Offense or Defense? Defining Your Stance With Tactical Tilt

Written by: Andy Hyer, Dorsey, Wright & Associates, a Nasdaq Company

Advisor Tip: Knowing when to take the Offense or Defense in Various Market Conditions is Easier to Define with Tactical Tilt

As we closed out the third quarter of 2016, it was clear that investors were feeling relatively calm. The extreme volatility of the past 18 months seemed to settle into much less choppy waters. But with interest rates poised for a hike, a new President headed to the White House in a matter of months, and high global economic uncertainty fueled by Brexit, the Middle East, and more, it’s unlikely the ship will remain so steady for long. When the market does begin to react, your clients will once again be looking for guidance and assurance. To be sure you’re prepared, now is the time to implement a more focused process and discipline into your investment approach. At Dorsey, Wright & Associates (DWA), a Nasdaq Company, we use the power of Tactical Tilt using the DWA Research Platform.

If you’re unfamiliar with the concept of Tactical Tilt, it’s an approach designed to create a careful balance between offensive wealth accumulation and defensive wealth preservation based on current market conditions.

The result: Tactical Tilt offers the potential to outperform the market without the level of increased risk that’s often associated with tactical asset allocation.

At Dorsey Wright, our approach to Tactical Tilt works like this:

  • Looking through a trend and relative strength lens, we create three specific indexes—conservative, moderate, and aggressive—to match different investors’ investment goals and thresholds.
  • Each Index is designed to provide variable exposure to ETFs and other securities that represent the highest ranked asset classes based on Relative Strength Tally Rankings in the form of point-and-figure charts.
  • To determine the most appropriate balance of assets in current market conditions, each major asset class (including cash) and each major investment sector within each class, is ranked by Relative Strength.
  • To complete the ranking, we systematically analyze the hundreds of Point-and-Figure Relative Strength charts by aggregating Buy Signals and Sell Signals within a “Matrix” format. When a column of Xs exceeds a previous column of Xs, the chart indicates a “Buy Signal” (also referred to as positive Relative Strength). When a column of Os exceeds a previous column of Os (also referred to as negative Relative Strength), the chart indicates a “Sell Signal.”
  • Once the analysis is complete, we are able to weight the four major macro asset classes—US Equity, International Equity, Fixed Income, and Cash—to dynamically balance risk and return based on each investor’s specific criteria. (In some market circumstances, additional asset classes may be added to the mix.)
  • Asset class weightings are applied through sector rotation strategies for each investment category, resulting in portfolios of approximately 15-25 ETFs utilizing the most appropriate mix of assets. The Index is evaluated on weekly basis for changes within the sub-asset class level, while the macro asset class rankings are evaluated on a monthly basis.
  • As these Relative Strength Tally Rankings change over time, the portfolios are designed to adjust positions to maintain the appropriate balance of risk and return. Much like a dimmer switch, this shift can be as gradual or dramatic as the data dictates.
  • Portfolios are “tilted” toward offensive positions in high-risk market environments, and tilted toward defensive positions in lower-risk environments—all within the guidelines of basic strategic investment boundaries. You can see the impact of this tilt in the following chart. In an offensive environment, a moderate Tactical Tilt strategy might invest up to 75% in US Equities and as little as 20% in bonds. In a defensive environment, the same moderate portfolio might allocate up to 75% of assets in non-equity investments such as cash, bonds, and alternatives to help preserve wealth during potential bear markets.
  • No one can predict when we may have to face another sustained bear market or when interest rates will once again rise from the historic lows we’ve seen since the Great Recession, but either (or both) of these events has the potential to threaten your clients’ ability to achieve their long-term financial goals. Tactical Tilt offers a flexible method for adapting to these shifts as they occur, giving advisors the power to leverage market opportunities while simultaneously reducing the level of risk often associated with alpha-focused strategies. Ultimately, Tactical Tilt gives advisors the power to ride the wave of current market trends, no matter what they may be, and “tilt” each portfolio to your advantage.

    Whether you are striving to attract Millennial investors, differentiate yourself from online roboadvisors, or instill greater trust among your existing client base, a passive investment approach simply isn’t enough to do the job in today’s changing and highly competitive market. By combining the proven power of modern portfolio theory with the control and adaptability of a Tactical Tilt approach based on Relative Strength Calculations, you can not only adapt to the fast-changing market, but also create a new level of differentiation as your clients’ trusted advisor.

    To learn more about Relative Strength and the Dorsey Wright Relative Strength strategies, download the whitepaper Point & Figure Relative Strength Signals , or contact us here. To learn more the DWA Technical Research platform, click here to take a free 21-day trial.

    Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Neither the information within this article, nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This article does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.

    The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

    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. Advice from a financial professional is strongly advised.