Disciplined Wealth Management - DWM

Higher Returns With Less Risk

 

Disciplined Wealth Management (DWM) is a registered investment advisor striving for “higher returns with less risk’. DWM acts as a sub advisor and provides research to institutional clients and direct advisory management assets. DWM primary work is acting as a sub-advisor on the Market Leaders (five separate strategies) and provides research for the Quantified Market Leaders Fund to Flexible Plan Investments.

 

DWM Philosophy

 

“Higher returns with less risk” is a goal that can be achieved in three ways:

• Opportunistic: own the leading asset or sector classes at the right time

•  Risk Management: Avoid the major market declines and participate in market advances.

• Leverage: returns can be enhanced but only judiciously.

 

Opportunistic:

 

Asset Classes:

 

Unlike a fixed-allocation strategy (Buy and Hope) which owns all the asset classes and/or sectors all the time, DWM approach is dynamic in nature. Fund selections and asset class exposures are continuously reviewed and adjusted. The goal is a diversified portfolio that allocates resources to the leaders with the potential to outperform the market while avoiding the laggards (weak asset classes that can drain portfolio performance.

 

If you own all the asset classes or sectors all the time, leaders and laggards, the best you can hope for is a market return, which will ride the ups and downs of the overall market.  The Opportunistic approach is to drill down and identify the current market leaders.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

​

​

 

Source = Investors FastTrack, Developed Countries = EFA, Emerging Markets = EEM, U.S. Small Cap Stocks = IWM, U.S. Mid Cap Stocks = IWR, U.S. Large Cap Stocks = IWB

 

 

The chart illustrates the potential of being Opportunistic in active management within asset classes. A typical fixed allocation (buy and hold) would have held all five the equity classes illustrated above (leaders and laggards). Unfortunately a lot of the over performance by the leaders would be washed away from the losses and underperformance of the laggards. With DWM’s active management, constantly reviewing and reallocating funds to leadership, the goal is to avoid the laggards and build a diversified portfolio (asset classes) comprised of the leaders.

 

However, DWM takes the opportunities within asset classes two steps further, “Drilling Down”:

• DWM further divides the small, mid and large caps into value or growth styles. As an example of the opportunities: for the majority of the first half of 2015 small cap growth (IWO) had gained almost 11% while small cap value was up just 3%. The opportunistic approach would to overweight to small cap growth.

• When possible, Drill Down further within the small cap universe of mutual funds to the leading small cap mutual fund or ETF.

 

Sectors:

 

Exciting opportunities are always present within sectors and industry groups. The S&P divides the market into 10 different sectors and those parts make up the whole. The Opportunistic approach asks “why own all the sectors all the time when you can own the leading sectors?”

 

 

​

​

​

 

 

 

 

 

 

 

 

 

 

 

 

 

 

​

​

​

 

 

 

 

​

​

 

Looking at the table, opportunistically, DWM sees two ways to achieve ‘higher returns’ within a sector strategy:

• First, expand the list from the original 10 S&P 500 sectors to include ‘growth’ sectors/industry groups like biotechnology and internet and eliminate defensive sectors like Utilities or Consumer Groups which drag down performance. Build a better universe.

• Second, don’t own all the sectors, strive to own the leading sectors.

 

During the time period illustrated above the S&P 500 gained over 90%, that is the sum of the 10 S&P sectors. Only four of the 10 reached triple digit gains, while within DWM’s sector growth universe of 13, seven achieved gains of over 100%.  More opportunities to achieve higher returns by striving to own the leaders within a ‘growth’ universe versus owning all the sectors.

 

 

 

 

 

 

How to determine Leadership

​

There is rotation in leadership over time within asset classes and sectors (thus giving us opportunistic advantage). How to determine leadership then becomes the question. Fortunately there is “Relative Strength” or “Momentum” or what is academically labeled “Persistency in Price”. The concept is what is leading often continues to lead and what is lagging often continues to lag.

 

Several Wall Street adages confirm the “Relative Strength”: “Don’t fight the tape”, “Cut your losses short and let your winners rung’ and our favorite, “Make the trend your friend’.

 

Persistency in Price

 

82 Year Study: 1/1/27-12/31/09               Annualized Return                $10,000 becomes (in Millions)

Owning Last Year's Leaders (Top 10%)                17.6%                                $572.8

All Stocks                                                         13.1%                                  $38.5

Owning Last Year's Laggards (Bottom 10%)           8.5%                                    $0.3

Source: What Works on Wall Street 4th edition

 

The table above reflects the results of just one academic study on the power of “Persistency in Price” to identify both leaders and laggards. Out of a universe of thousands of stocks, building a portfolio of the top 10% of the prior leaders and a portfolio of the bottom 10% and then holding them for the coming year, the results were overwhelming.  Relative Strength is very powerful tool and one DWM relies upon to separate the leaders from the laggards in building strategies out of asset classes and sectors.

 

 

Risk Management

 

Markets, sectors and asset classes go thru periods of advancement and decline. While it is impossible to buy at the exact bottom or sell at the exact top, DWM strives to participate in the majority of the uptrends while avoiding the majority of the major downtrends. This is an essential part of achieving “higher returns with less risk”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

​

Large losses require large gains just to get back to break even. The past decade (and some) was a tragic example: the almost 50% decline from 2000-2002, took a 100% gain over the next five years (2002-07) to break even. Only to have the same exact pattern be repeated (50% decline, 100% recovery) to be repeated from 2007-2012.  Over a decade of no real returns!

 

If a 50% decline can be avoided with just a 10% or 20% loss, than when the next 100% rally occurs, instead of just getting back to even, like the buy-hold investor, the majority of the new advance will be real gains for the investor having the smaller loss.

 

DWM believes large market (or sector) declines can be avoided thru the application of time tested quantitative algorithmic signals. DWM employs two different sets of risk management indicators: a macro (overall market direction) and tailored micro signals (fitted to an individual asset class or sector).

 

Macro: Market Environment Indicator (MEI)

 

DWM begins with an intermediate term overall market-environment signal (MEI), a weekly composite view of the technical health of the equity market by measuring over 200 indicators of 100 sub industry groups. The MEI measures the trend of the sub-industry’s moving average and the momentum of the sub-industry’s price index. From this weekly data, DWM determines if the market is bullish (rising), neutral or bearish (declining).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

​

 

 

DWM uses the weekly readings from the MEI to determine equity exposure within its strategies. Unlike a fixed allocation that is always 100% invested, DWM will vary equity exposure from 0% to 50% to 100% (or more in leveraged strategies).

 

 

Micro: Individual Fund Signal (IFS)

 

Troy Schield, President and Chief Strategist, has been researching, refining and employing Individual Fund Signals since 1990. Each asset class or sector often dances to a different tune. As an example of dancing to a different drummer, during the final six months of 2014 with the fall in oil prices, energy services fell over 38% while the overall market gained 6%. An IFS which identifies the trend of individual sectors as being bullish, or bearish and helps determine the sector allocations.

 

Micro: Relative Strength Analysis (RSA)

 

Next, it seeks to identify the top performing funds within the investment options available (Equity Style Boxes, Sectors, Internationals, and Bonds), applies a tactical rotation to the strongest groups and avoids the laggards, with the flexibility to change the asset mix as market conditions change. To determine the best funds for investment, DWM uses quantitative analysis of proprietary relative strength to identify leading asset classes, and then ranks all the individual funds within those asset classes. DWM utilizes available funds to create three risk-based portfolios: aggressive, moderate, and conservative (click the Models link at the left for more detailed information). Communication between the two of us (Advisor and Client) and completion of the Investor Profile will determine which portfolio is best suited to you.

 

While the common wisdom is that investments should be diversified across all asset groups at all times, history has shown that major equity style cycles exist: this presents investment opportunities. By employing relative strength analysis along with risk management, DWM adds value by identifying the leaders and avoiding the laggards.