Registered Investment Advisor. 595 E. Colorado Blvd., Suite 518 Pasadena, CA (626)

Transcription

1 Registered Investment Advisor 595 E. Colorado Blvd., Suite 518 Pasadena, CA (626)

2 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

3 Process How effective has Relative Strength been over time? 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 12.01%. His Price Momentum Model has had an average annual return of 21.14%. 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.

4 Process Conclusions from Dorsey Wright s 2005 published research Able to deliver 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

5 3-Year Milestone 3-Year Net Annualized Performance Aggressive 15.25% Core 12.61% S&P 500 TR 4.41% Aggressive (Net) Core (Net) Mar- 05 Jun- 05 Sep- 05 Dec- 05 Mar- 06 Jun- 06 Sep- 06 Dec- 06 Mar- 07 Jun- 07 Sep- 07 Dec- 07 Mar- 08 Jun Mar- 05 Jun- 05 Sep- 05 Dec- 05 Mar- 06 Jun- 06 Sep- 06 Dec- 06 Mar- 07 Jun- 07 Sep- 07 Dec- 07 Mar- 08 Jun- 08 RS Aggressive S&P 500 RS Core S&P 500

6 Construction Process Sector Model Sector Model determines the ideal weight of 10 Macro Sectors and 65 Industry Groups Review Rigorous qualitative review of suggested model changes Portfolio Construction stocks are selected for the portfolio Stock Model Universe screened for sufficient liquidity and ranked by relative strength model Sell Discipline Disciplined exit criteria based on Relative Strength Rankings

7 Hypothetical Historical Performance: 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 Please see important disclosures in Appendix A.

8 Hypothetical Historical Performance: 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 Please see important disclosures in Appendix A.

9 Hypothetical Historical Performance: 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 Please see important disclosures in Appendix B.

10 Adaptation What can the peppered moth teach us about portfolio management? 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

11 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Relative Strength Adaptation Basic Materials Allocation (SRS Aggressive) Current S&P 500 Materials Weight Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

12 30% 25% 20% 15% 10% 5% 0% Relative Strength Adaptation Financials Allocation (SRS Aggressive) Current S&P 500 Financials Weight Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

13 When 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

14 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

15 Advantages

16 Availability at Smith Barney CES Platform Systematic RS Core IMS 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: andyh@dorseywright.com

17 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 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.

18 Disclosures: Appendix B Historical Performance Of the Dorsey, Wright Systematic Relative Strength Strategies The hypothetical performance charts compare the returns of the Dorsey, Wright Systematic Relative Strength Socially Responsible Investing (SRI) Core strategy with the returns of S&P 500 total return index. The beginning of the test period is March 30, 2001 and is assigned an arbitrary value of 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 SRI Core Model the performance is that of a hypothetical portfolio managed in accordance with the dictates of its strategy 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 SRI Core portfolio. 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. 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.

19 Registered Investment Advisor 595 E. Colorado Blvd., Suite 518 Pasadena, CA (626)