DAL Investment DAL Investment Company Company NoLoad FundX FundX NoLoad FundX Upgrader Upgrader Funds Funds FundX Janet Brown Janet Brown
DAL Investment Company � Money Management since 1969 – $2 million minimum $1.3 Billion aggregate assets under management. � NoLoad FundX Newsletter since 1976 – 13,000 subscribers DAL’s proprietary newsletter composed of hypothetical portfolios of investments chosen using the Upgrading strategy. � Manager of FundX Upgrader Funds since 2001 – $850 million While the funds are no-load, management fees and other expenses still apply. Please refer to the prospectus for further details.
Agenda • 40 Years of Following Market Leadership – What has happened in the market and our firm • The Upgrading Strategy Applied – How we build portfolios and manage risk – Relative performance and observations • New Tools and How to Use Them – Why we built them – What we’re working on • Q&A
History of Upgrading
Accolades
What is Upgrading ? � Why Upgrading Works � Current Performance is Key � Many Ways to Upgrade � Common Objections
Upgrading An effective, disciplined response to changing market conditions.
20 Year Performance (Average Annual Returns 1987 – July 2008) 15.2% 11.8% 4.5% 3.0% ��������� ������ �������� ��������� ������� As measured by the S&P 500 Index 1 �������� Source of chart data: Dalbar, Inc. Quantitative Analysis of Investor Behavior, July 2008 update. QAIB calculates investor returns as the change in assets, after excluding sales, edemptions and exchanges Upgrading ‘s performance per the Hulbert Financial Digest.
How Upgrading Works
Stay with the Winners � Invest in the funds currently leading the market. � Stay with the winners and Upgrade the laggards.
10 Year Performance
Why Upgrading Works Managers Don’t Change. Markets Do. Most managers have a particular investment strategy that performs well in some but not all market environments.
Rotation of Market Leadership � Value and Growth investment styles � Small cap and Large cap � International and Domestic
Upgrading vs Market Indices
International & Domestic
Upgrading & Market Changes
Upgrading & Market Changes
Upgrading Fundamentals � Don’t Forecast. Accept the market’s trends whether or not we understand the reasons for these trends. � Realize the market will change. Stay alert in order to recognize changes in the market environment. � Move incrementally. Rotation generally occurs in fits and starts, and often fails to endure.
Monthly Upgrader Portfolio • Core of Class 3 funds • Limited exposure to more volatile funds • Holds funds a minimum of 90 days, often longer • Usually lower turnover
Yearly Performance Record
Upgrading vs Buy and Hold 2000 through 2008 Cumulative Annualized Monthly Upgrader 40.41% 3.84% Portfolio Russell 2000 11.07% 1.17% DJIA -6.93% -0.71% EAFE -19.18% -2.34% S&P 500 -28.27% -3.62% Nasdaq -61.25% -10.00%
Managing Volatility
Flexible Income Strategy ?
Setting Expectations • Upgrading only outperforms 55% of the time • Class 3 funds are typically fully invested • The beta (risk) of Upgraded portfolios changes over time • Many individual trades do not add value • Upgrading usually lags in transitions • Upgrading has consistently outperformed through market cycles for long term investors!
Market transitions
27+ Year Performance
Tax Efficiency of the MUP
2008: Life on the Left Tail 2007 2005 1994 2006 1993 2004 1987 1992 1984 1988 Calendar Year Stock Returns 1978 1982 1970 1979 (1825-2008) 1956 1971 1953 1968 1948 1965 1947 1964 1939 1959 2000 1923 1952 1990 1916 1949 2003 1981 1912 1944 1999 1977 1911 1942 1998 1966 1906 1938 1996 1962 1902 1926 1991 1960 1896 1921 1986 1957 1895 1919 1983 1946 1894 1909 1980 1940 1892 1905 1976 1934 1889 1900 1972 1929 1888 1899 1967 2001 1914 1882 1897 1963 1973 1913 1881 1886 1961 1969 1910 1875 1878 1951 1997 1941 1890 1871 1874 1950 1995 1932 1887 1870 1872 1943 1989 1920 1883 1869 1864 1925 1985 1903 1877 1867 1858 1924 1975 1893 1873 1866 1855 1922 1958 1884 1861 1865 1850 1918 1955 2002 1876 1860 1859 1849 1901 1945 1974 1854 1853 1856 1848 1898 1936 1954 1930 1841 1851 1844 1847 1891 1928 1935 1917 1837 1845 1842 1838 1885 1927 1908 1907 1831 1835 1840 1834 1880 1915 1879 2008 1857 1828 1833 1836 1832 1852 1904 1863 1933 1931 1937 1839 1825 1827 1826 1829 1846 1830 1843 1862 -50% -40% -30% -20% -10% 0% 10% 20% 50% 30% 40% 60% Source: Robert Shiller, FMRCo (MARE) as of 12/31/2008.
Recovery Times
Basic Choices • Assets • Stocks • Commodities • Real Estate • Debt • Bonds • Preferred Stocks • Cash
Investing in Cash Not A Compelling Long-Term Strategy Value of $1 Invested (1925-2008) $10,000 S&P 500 Average Ending Bonds Annual Cash Value U.S. Inflation Return $1,000 S&P 500 9.6% $2,023.72 Bonds 5.5% $83.81 Cash 3.7% $20.50 $100 U.S. 3.1% $12.17 Inflation $10 $1 $0 2008 1925 1929 1933 1937 1941 1945 1949 1953 1957 1961 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 1965 Source: Ibbotson, FMRCo (MARE) as of 11/30/2008. Figures assume reinvestment of capital gains and dividends, but does not reflect sales charges or taxes, which would lower these figures. Past performance is no guarantee of future results. You cannot invest directly in an index. See footnotes for important index definitions. Cash – Ibbotson Associates SBBI 30 Day TBill Total Return Index; Inflation – Ibbotson Associates SBBI U.S. Inflation; Bonds – MARE Custom Bond Index (see footnotes page for details.)
What We Know • Limited Investment Options • Current Yields of Bonds and Cash • Recent Stock Market Returns • Current Stock Valuations
2009: S&P500 Index YTD
What We Don’t Know • Future Inflation • When Interest Rates will Go Up • Will the Stock Market Bottom? - When and at What Level
3 Year Investment (1925-2008)
10 Year Investment (1925-2008)
20 Year Investment (1925-2008)
Allocation Changes Over Time Year 1 Year 25 Years Years Years Years Years 1-2 3-7 8-12 13-17 18-25 Cash Bonds Stocks
Allocation Changes Over Time 2009 2024 2014 2032-2034 2034 2034 2034 2030 2034 100% 10% 20% 50% 8% 30% 30% 0% 42% 24% 20% 68% 38% 60% 0% Cash Bonds Stocks
Risk Classification and Portfolio Construction /Management Current High Ranking Funds Portfolio Weight Class Type Ticker MUP FUNDX HOTFX 1.4% 1.1% 2.9% 1 China MCHFX /FXI 2% 2.5% 5.3% 1 Gold GLD 3% 3.3% 7.5% 2 Em Mkts EEM 2.6% 1.7% 3.6% 2 Mid Cap BUFMX/DVLIX 2.6% 0.7% 4.4% 2 TCW select TGCNX 9.7% 6.3% 4.9% 3 Hussman HSGFX 4.7% 5.1% 4.9% 3 Oakmk Intl OAKIX 6.8% 6.9% 5.5% 3 SP500 Eq RSP
Risk Spectrum (Mutual Funds) Concentrated and Leveraged Funds Aggressive Growth Funds Risk Growth Funds Balanced Funds Fixed Income Money Market Expected Return
Risk Spectrum (NoLoad Fund*X) Class 1 Class 2 MUP Risk Class 3 Class 4 MFIP Class 5 Money Market Expected Return
Risk Spectrum (Upgrader Funds) STOCX HOTFX/UNBOX TACTX FUNDX/REMIX Risk RELAX INCMX Expected Return
Upgrading Applied to ETFs
Decisions Tempting, but most investors lack the Time tools, discipline and knowledge Manage Accept Risk (Volatility) Often leads to disappointment… Avoid many “timers” are really “avoiders”
What do we mean by “Tactical” Fully Invested Fully “Hedged”
Popular Timing Models • Moving Averages • Stop Losses • Valuations • Rebalancing • Don’t Fight the Fed • Gut Feelings
A Weight of the Evidence Approach Quantifiable Measures of Market Environment Sentiment Valuation Participation Environment Divergences
Examples of Key Factors • Expanding or Contracting Money Supply • Valuations (Relative to Normal Earnings) • Number of New Highs Vs. New Lows • Volume in Advances Vs. Declines • Bond Yields Vs. Earnings Yield or Dividends • Percentage of Industries in Uptrend • Sentiment
Composite Model • 10 models, equally weighted • +1 = buy, 0 = neutral, -1=sell • If net score -1 or lower, hedge • If net score >+2, fully invested
Pros and Cons of Timing Pros Cons • Allows opportunity to • May be out of synch with a participate in market gains significant advance. with a trigger to help avoid • Requires more frequent some declines. trading and therefore may • May improve long-term incur greater tax liability. performance and reduce • May sell after a decline and volatility. miss an advance before getting back in.
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