|Sports fans typically spend time thinking about their favorite team before a season begins. They measure the
potential of their team in the pending season by the strength of its individual components: players, the coach, the general manager and the owner’s budget. The fan’s optimism about a team’s potential is often driven by the steps the team takes to strengthen these components from one season to another—management’s commitment to rebuild a team with younger players, to shore up key weaknesses or its efforts to change the chemistry of the entire team. While a fan may view these steps with optimism or pessimism, none of these actions will matter until the season begins and the team can be measured on the field. The team’s standings will indicate how it is performing relative to other teams in its league. Management may take additional steps during the season to strengthen emerging weaknesses to further improve performance. The fan’s excitement or disappointment about his team’s performance during that season will depend on the short-term or long-term expectations the team’s management established at the start of the season.|
A measure of price trends
(winning percentage) that indicates
how a security (team) is performing
relative to other securities (teams)
in its category (league).
|The fan’s dilemma for their team is very similar to what an investor experiences with their portfolio. Just as a team’s performance can be measured, so can the components of a portfolio. The potential of an investor’s portfolio is often measured by its individual components: security or asset classes, asset allocation, portfolio management and risk levels. Expectations are typically established by market conditions and the investor’s time horizon. Once the investor has committed to an investment design, the performance of securities or asset classes within a portfolio is typically measured against, or relative to, a market benchmark. The relative strength of the portfolio and securities within it can also be viewed over certain time horizons to help manage performance expectations.|
A Management Tool|
In a sports tournament, a team’s ultimate goal is to win. Similar to a team’s management, a portfolio manager may increase or decrease allocations to existing positions and constantly monitor different asset classes to identify emerging trends. Likewise, a relative strength portfolio manager uses a tournament approach to narrow a portfolio to a group of the strongest securities.
Note: These asset classes were used to create the “Relative Strength Team”.
In the first round of the tournament, securities are grouped and compared by within their asset class to identify the top-performing representatives. In the second round, relative strength is
used to compare the strength of each asset class to allocate larger (strong relative strength) and smaller (weak relative strength)
positions to these asset classes within the portfolio. In sports, a tournament is repeated at the end of each season. But the
frequency of a relative strength tournament is based on the time frames being used. Managers can use short-term, intermediate or
long-term measurements either individually or combined, and they can run this test as frequently as they deem necessary.
Relative Strength Team: The top asset classes in the market performance table (above)
using a combination of applicable indexes measured by intermediate- to long-term relative strength.
A Long-term Focus
It’s quite rare to see a sports team repeat
as champions year after year. Likewise,
an investor’s portfolio doesn’t lead the
market year after year. A manager who relies on relative strength to identify portfolio positions will occasionally underperform the market when trends are dramatically changing—the security market is cyclical and sometimes the relative strength measurement period may not align with those short-terms changes. Historically, there tend to be periods of underperformance of relative strength
investing followed by periods of strong outperformance. The disciplined relative strength approach helps investors identify and combine the strongest securities, building a winning team over the long term.
The chart to the right
illustrates the annualized
performance difference of a
relative strength approach
a 60/40 market
three-year holding periods.
|Rolling Average Difference
Past performance does not guarantee future results. Index returns assume reinvestment of dividends, but do not reflect any management fees, transaction costs or expenses. Indexes are generally unmanaged and are not available for direct investment. Data Source: Morningstar, June 30, 2019, calculated by Arrow.
Past performance is not indicative of future returns.
Historical data may be used for illustrative purposes only and should not be
used as a predictive measure for the future return expectations of any
investment. This information is based on hypothetical strategies and should not
be construed as a recommendation of any specific security or investment
product. The information was prepared without regard for specific circumstances
and objectives of any individual investor. Managed futures investing involves
risks, including the potential for loss of principal. Data source: Morningstar
Asset class proxies: U.S. Stocks (S&P 500); U.S. Small Stock (Russell
2000); International Stocks (MSCI EAFE); Emerging Markets (MSCI EM); Bonds
(BBgBarc US Agg Bond); Ultra Short Bonds (Halyard Taxable RCM) Commodities
(S&P GSCI); Managed Futures (DUNN WMA). Hedge Funds (Credit Suisse Hedge
Fund); Gold (LBMA
Gold Price); Global Macro (DWSRS Glb Macro); REITS (FTSE Nareit All Equity
REITs; Gold (LBMA Gold Price). Returns
assume reinvestment of all dividends and do not reflect any management fees,
transaction costs or expenses. The indexes are unmanaged and are not available
for direct investment.
Before investing, please read the prospectus and
shareholder reports to learn about the investment strategy and potential risks.
Investing involves risks, including the potential for loss of principal. An
investor should consider the fund’s investment objective, charges, expenses and
risks carefully before investing. This and other information about the fund is
contained in the fund’s prospectus, which can be obtained by calling
1-877-277-6933. Content reviewed by an affiliate, Archer Distributors, LLC.