Systematic Relative Strength

7/31/2014

The Arrow DWA Balanced Fund (DWAFX)

At the end of July, the fund had approximately 40% in U.S. equities, 27% in Fixed Income, 22% in International equities, and 11% in Alternatives.

We had one change in July—replaced a position in Netherlands with Taiwan. The addition of Taiwan is the first signs of Emerging markets starting to come back into the fund. Developed international markets have been stronger than Emerging markets for quite some time, but that is showing some signs potentially changing. For the month, our best performing holdings were Technology, Real Estate, and Healthcare, while much of our exposure to Europe was a drag. If we continue to see weakness in our International equity holdings, this could be an area where we see more changes in the coming weeks.

DWAFX lost 2.46% in July, and is up 0.27% YTD through 7/31/14.

We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership. When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints. Relative strength provides an effective means of determining the appropriate weights of the strategy.

The Arrow DWA Tactical Fund (DWTFX)

At the end of July, the fund had approximately 89% in U.S. equities and 9% in Real Estate.

We had a couple of trades in July—sold two of our European equity positions and Agricultural Commodities and bought Large Cap Growth, a Dividend fund, and Real Estate. The declining relative strength of U.S. Small Caps has been one of the key changes in the fund so far this year. We came into 2014 with 30 percent exposure to U.S. Small Caps, but now have zero. The purchases this month reflect the continued relative strength improvement of U.S. Large Caps. In July, our Healthcare position and a couple of our other Large Cap positions held up relatively well, while some of our Mid Cap and European equity positions were a drag on the portfolio.

DWTFX lost 3.12% in July, and is down 0.68% YTD through 7/31/14.

This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes. The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income. Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends. Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.

A list of all holdings for the trailing 12 months is available upon request. Past performance is no guarantee of future returns. These relative strength strategies are NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. See www.arrowfunds.com for a prospectus.