What's Hot ... and Not
How different investments have done over the past 12 months, 6 months, and 1 month. As of 7/21/17.
Never before has it been easier for investors to invest in the strongest trends wherever they might be found in the world. Relative strength offers an ideal framework for allocating among those trends. Markets are global and your portfolio should be too.
See disclosures in Appendix A.
High RS Asset Class
High RS stocks, as an asset class, often move independently of broad indexes. As of 7/21/17.
See disclosures in Appendix A.
Fund Flows
Total estimated inflows to long-term mutual funds and net exchange traded fund (ETF) issuance collected by The Investment Company Institute.
See disclosures in Appendix A.
Sector and Capitalization Performance
See disclosures in Appendix A.
High RS Diffusion Index
As of 7/21/17:
After reaching a recent single-day low of 40% on 4/13/17, this index has rebounded sharply. The 10-day moving average is 87% and the one-day reading is 89%.
See disclosures in Appendix A.
Relative Strength Spread
The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 7/21/17:
The RS Spread has risen strongly in recent months, reflecting the outperformance of the RS leaders compared ot the RS laggards.
See disclosures in Appendix A.
Home Country Bias---A Global Phenomenon
A recent Vanguard research piece highlights the prevalence of home country bias in investment portfolios:
What this chart is showing is that every country has a home bias. So, if you’re an American investor you tend to hold mostly domestic stocks. If you’re a Japanese investor you tend to hold mostly Japanese stocks. So on and so forth. And what’s crazy to think here is that you’re literally just buying stocks from one country because you were born there and for whatever reason, you think that’s the only country whose stocks you should own. Of course, we should know better.
The empirical research (see Aness 2011 & Vanguard 2006) clearly shows that international diversification works. And it works for the same reasons that domestic diversification works. Basically, by owning a bigger pool of assets you reduce specific risks within your domestic economy such as domestic economy risk and currency risk.
A great example of this is Japan. One of the great worries every investor has is falling into the Japan trap where you undergo 20 years of stagnant or negative returns. As I noted in “The Importance of Global Asset Allocation“, it’s imperative that investors diversify abroad to avoid such a risk. Yet almost every domestic investor has an overweight in their domestic economy.
It just shows that irrational investing persists despite the well founded empirical evidence that shows how risky home bias can be.
While academic research shows that diversification into global markets can be beneficial over full market cycles investors find reasons to continually focus on their home market. The some of the reasons highlight by the article include:
- Preference for familiar companies
- Fluctuations in currency markets
- Trading difficulties
- Risk mitigation problems
- Transaction costs
However as the spotlight continues to shine on International Equities and global markets outpace the US for the first time in several years this will become a growing issue. In D.A.L.I. International Equities have continually strengthened over the past year moving from the bottom of the pack to the second place position just behind US Equities.
The continued strength has compelled some investors to start shifting portfolio allocations into the global markets. Inflows into International mutual funds and ETFs have outpaced domestic funds year to date according to Kiplinger. One place advisors who utilize our Systematic Relative Strength portfolios have looked is the SRS International Managed Account. The strategy invests in 30-40 US listed ADR’s and utilizes the same methodology as some our domestic equity accounts. Utilizing ADR’s simplifies the trade process with all transactions being done in USD and on US exchanges, reducing the head ache involved with multiple accounts in foreign currencies.
This portfolio is available as a separately managed account and a unified managed account at a number of firms. If your clients fall into the category of investors who need to beef up their International Equity exposure this may be a solution that they can get excited about. To receive the fact sheet for this portfolio, please e-mail andyh@dorseymm.com or call 626-535-0630.
1The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength International Model. Net performance shown is total return net of management fees, commissions, and expenses for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account. The advisory fees are described in Part 2A of the adviser’s Form ADV. The starting values on 3/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter. All returns since inception of actual Accounts are compared against the NASDAQ Global ex US Index. The NASDAQ Global ex US Index Total Return Index is a stock market index that is designed to measure the equity market performance of global markets outside of the United States and is maintained by Nasdaq. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable. There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.
Past performance is no guarantee of future returns.
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Arrow DWA Balance Fund (DWAFX) and Arrow DWA Tactical Fund (DWTFX & DWAT)
First Trust DWA UITs and ETFs
AdvisorShares
ALPS
Elkhorn Investments
Virtus Investment Partners
Dorsey Wright SMAs and UMAs
Dorsey Wright White Papers
Other Relative Strength Sources
- Brush, John S. "Eight Relative Strength Models Compared." Journal of Portfolio Management (1986).
- Berger, Israel, Moskowitz. "The Case for Momentum Investing." AQR Capital Management. 2009.
- Jegadeesh and Titman. "Returns to Buying Winners and Selling Losers." Journal of Finance (1993).
- O'Shaughnessy, James P. What Works on Wall Street. McGraw Hill, 1997.
Appendix A
The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable (“information providers”). However, such information has not been verified by Dorsey, Wright & Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. You should consider this strategy’s investment objectives, risks, charges and expenses before investing. The examples and information presented do not take into consideration commissions, tax implications, or other transaction costs.
The returns shown in the Sector and Capitalization Snapshot are price returns only.
“High RS Index” is a proprietary Dorsey, Wright Index composed of stocks that meet a high level of relative strength. The volatility of this index may be different than any product managed by Dorsey, Wright. The “High RS Index” does not represent the results of actual trading. Clients may have investment results different than the results portrayed in this index. Performance for both the High RS Index and S&P 500 is price returns only.
What's Hot...and Not Disclosures
The performance above is based on total returns, but does not include transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
High RS Asset Class Disclosures
The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
Fund Flows Disclosures
This example is presented for illustrative purposes only and does not represent a past recommendation.
High RS Diffusion Index Disclosures
The index above is based on pure price returns, not inclusive of dividends or all transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
Relative Strength Spread Disclosures
The index above is based on pure price returns, not inclusive of dividends or all transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
