Registered I nvestm ent Advisor 5 9 5 E. Colorado Blvd., Suite 5 1 8 Pasadena, CA 91 1 0 1 ( 6 2 6 ) 5 35 -0 6 3 0 w w w .dorseyw rightmm.com
Relative Streng Relative Strength th Process • We use Relative Strength to identify “Fast” stocks and “Slow” stocks • Like building a stable of racehorses, we want a stable of “Fast” stocks • We don’t buy “Slow” stocks and hope they learn how to run “Fast” • Our process systematically replaces “Slow” stocks with “Fast” ones
Relative Streng Relative Strength th Process How effective has Relative Strength been over tim e? Dr. Ken French is a well-known finance professor at the Tuck School at Dartmouth. He’s also known for his long-time association with Eugene Fama at the University of Chicago. French maintains data from the Center for Research in Security Prices at the University of Chicago and analyzes the returns of various investment strategies, including relative strength. French has data on a simple relative strength model which consists of the top 10% of securities in the universe based on their trailing 11 month price momentum. The portfolio is systematically reconstructed each month. Conclusions from Dr. French’s Price Momentum Model • From 1927 to 2007 the overall market has had an average annual return of 1 2 .0 1 % . His Price Momentum Model has had an average annual return of 2 1 .1 4 % . • French’s model has 91% average annual turnover (versus average of 130% among mutual funds, according to Morningstar.) • French’s model outperformed the market in every single decade.
Relative Streng Relative Strength th Process Conclusions from Dorsey Wright’s 2005 published research • Able to deliver 300-900 basis points of annual excess performance over 14-year time period • Anyone care to argue that the market is efficient? • Monte Carlo simulations used to demonstrate the robust nature of relative strength
Relative Streng Relative Strength th 3 -Year Milestone 3 -Year Net Annualized Perform ance Aggressive Core S&P 5 0 0 TR 1 5 .2 5 % 1 2 .6 1 % 4 .4 1 % Aggressive ( Net) Core ( Net) 180 180 170 170 160 160 150 150 140 140 130 130 120 120 110 110 100 100 90 90 Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- 05 05 05 05 06 06 06 06 07 07 07 07 08 08 05 05 05 05 06 06 06 06 07 07 07 07 08 08 RS Aggressive S&P 500 RS Core S&P 500
Relative Streng Relative Strength th Construction Process Sector Model Sector Model determines the ideal weight of 10 Macro Sectors and 65 Industry Groups Portfolio Construction Review 20-25 stocks are selected for the Rigorous qualitative review of portfolio suggested model changes Stock Model Sell Discipline Disciplined exit criteria based on Universe screened for sufficient Relative Strength Rankings liquidity and ranked by relative strength model
Relative Streng Relative Strength th Hypothetical Historical Perform ance: Aggressive Past performance is no guarantee of future results. Returns are hypothetical through 3/ 31/ 05. Actual accounts were opened and have been invested using the model since second quarter 2005. Please see im portant disclosures in Appendix A.
Relative Streng Relative Strength th Hypothetical Historical Perform ance: Core Past performance is no guarantee of future results. Returns are hypothetical through 3/ 31/ 05. Actual accounts were opened and have been invested using the model since second quarter 2005. Please see im portant disclosures in Appendix A.
Relative Streng Relative Strength th Hypothetical Historical Perform ance: Socially Responsible Past performance is no guarantee of future results. Returns are hypothetical through 3/ 31/ 07. Actual accounts were opened and have been invested using the model since second quarter 2007. Please see im portant disclosures in Appendix B.
Relative Streng Relative Strength th Adaptation W hat can the peppered m oth teach us about portfolio m anagem ent? “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” --Charles Darwin
Relative Streng Relative Strength th Adaptation Basic Materials Allocation (SRS Aggressive) 18% 16% 14% 12% 10% 8% 6% 4% Current S&P 500 Materials Weight 2% 0% Apr-05 Jun-05 Aug-05 Apr-06 Jun-06 Aug-06 Apr-07 Jun-07 Aug-07 Dec-04 Feb-05 Oct-05 Dec-05 Feb-06 Oct-06 Dec-06 Feb-07 Oct-07 Dec-07 Feb-08
Relative Streng Relative Strength th Adaptation Financials Allocation (SRS Aggressive) 30% 25% 20% Current S&P 500 Financials Weight 15% 10% 5% 0% Jun-05 Jun-06 Jun-07 Dec-04 Feb-05 Apr-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Aug-07 Oct-07 Dec-07 Feb-08
Relative Streng Relative Strength th W hen is RS in or out of favor? Relative Strength Spread • RS strategies go through periods of outperformance & underperformance • RS performs best when there is stable & defined leadership • RS is trend following so it will underperform during major market changes • Underperformance is often shorter than many other strategies
Relative Streng Relative Strength th Advantages • Robust stock selection methodology • Objective model inputs – no forecasting • Portfolio adapts to changing market conditions • Tax efficient turnover • Systematic approach takes emotion out of the equation
Relative Streng Relative Strength th Advantages
Relative Streng Relative Strength th Availability at Sm ith Barney CES Platform Systematic RS Core I MS Platform Systematic RS Aggressive Systematic RS Balanced Systematic RS Socially Responsible Systematic RS Int’l For questions about opening an account, please contact Andy Hyer: Phone: 626-535-0630 E-Mail: andyh@dorseywright.com
Relative Streng Relative Strength th Disclosures: Appendix A Historical Performance Of the Dorsey, Wright Systematic Relative Strength Strategies The hypothetical performance charts compare the returns of the Dorsey, Wright Systematic Relative Strength Aggressive and Core strategies with the returns of S&P 500 total return index. The beginning of the test period is December 29, 1995 and is assigned an arbitrary value of 100.00 on that date. The volatility of the Models and of actual Accounts may be different than the volatility of the S&P 500 index. For the Systematic Relative Strength Aggressive and Core Models the performance is that of a hypothetical portfolio managed in accordance with the dictates of their respective strategies for the historical periods indicated and the actual performance of actual Accounts since their inception. The hypothetical returns have been developed and tested by the Manager, but have not been verified by any third party and are unaudited. 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. The performance of the Models, prior to the inception of actual accounts, was achieved by means of retroactive application of a model designed with hindsight. For the hypothetical portfolios, returns do not represent actual trading or reflect the impact that material economic and market factors might have had on the Manager’s decision-making under actual circumstances. Actual performance of each of the account styles may differ from the performance of the hypothetical portfolio for the following reasons: the Account may not be fully invested at all times; not all stocks in the Account may be weighted equally at all times due to appreciation or depreciation in a stock’s value; or in managing the Accounts, Dorsey, Wright & Associates may make limited modifications to the Strategy as necessary to comply with federal tax laws. The returns of the Models do not include dividends. The net performance of the hypothetical portfolios include deduction of a 3% annual fee from the Aggressive and Core portfolios. Dorsey, Wright’s advisory fees are described in Part II of the adviser’s Form ADV . All returns since inception of actual Accounts do reflect reinvestment of dividends and other earnings. Returns of actual Accounts, since inception, are a composite of all Accounts of that style that were managed for the full quarter. All returns since inception of actual Accounts are compared against the S&P 500 total return index or the EAFE total return index. Past performance, hypothetical or actual, 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.
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