The rules for our investment models are based on a process called Relative Strength. The history of Relative Strength goes back to the early 1930’s. The calculation is simply done by dividing the price of one investment by the price of another and then multiplying that number by 100. Because of this simple equation, the concept of Relative Strength can be applied across the entire spectrum of financial products. In sum, Relative Strength can help to answer the broad asset class allocation questions related to bonds, stock, sector rotation and permit you to pinpoint specific comparisons. For example, whether crude oil is outperforming copper.
All of our portfolios use a variation of the following rules for investment selection.
1. Assemble Investment Choices.
2. Determine the Strongest Investments.
3. Invest in the Top Five Fund Scores* concerning investment selection.
4. Assess Market Risk using money-market percentile ranking.
5. Rebalance Quarterly Plus a Month.
(February, May, August and November)
*What is Fund Score?
The fund score measures asset strength on a scale of 0 through 6 using an equation based on 1/3rd trend analysis, 1/3rd Peer Relative strength and 1/3rd market relative strength. Re-ranking takes place four times a year using dates in the months of February, May, August and November determined by a 91 day holding period in order to re-balance into the stronger Scoring funds at that moment. The Money Market Proxy is also included in the line-up so that it’s Score can be counted among the Top 5 as well. The Model Rules include that the selected funds must be above the Score of 2 to get into the line-up. Under conditions where that is not the case, then Money Market will take the place of those slots. (this occurred in early 2008) This automatically raises cash in advance of severe market downturns. The Seasonal Investment rhythm aligns with the seasonal performance bias of the overall markets and seems to enhance the overall long term return profile of an asset allocation model. This model follows asset strength concerning US and Non-US equity assets as well as all broad types of fixed income as well as cash. As market themes change, so also does this model mix as the Fund Score determines where that strength resides.
An additional “Layer” added to these rules is the tracking of the Money Market Percentile Rank (MMPR) as well as the Core Percentile Rank (CPR) providing a 2 Factor Authentication to move out of the market. If the Core Percentile Rank (a measurement of the S&P 500 asset class versus all other asset classes available) falls below 40% level and the Money Market Percentile Rank (Money Market versus all asset classes) is at 50% level or greater, at the end of each month (even though the basic rules run on a quarterly basis) the reaction is to instantly move 100% to Money Market in order to eliminate portfolio risk. Once the MMPR and CPR is triggered for the model to go to cash, the model is checked at the end of each subsequent month to see if the MMPR level drops low enough to go back into a line-up of assets and resume the seasonal quarterly cycle. This
This feature provides a level of risk management for our clients that is unique to investment management companies and to my knowledge very few if any firms provide.
The relative strength strategy is not a guarantee. There may be times when all investments are unfavorable and depreciate in value.