arrow funds relative strength
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Long/Short Sector Relative Strengthg/ g
Financial professional use only. Do not distribute to the public.
Distributed by Aquarius Fund Distributors, LLC - Member NASD, SPIC
Agenda
On today’s call we will discuss:
•Long/Short Sector Relative Strength:• Beyond Relative Returns• Absolute Return Focus Absolute Return Focus • Creating Absolute Return Strategies
•Performance Review•Performance Review
-Arrow DWA Balanced FundJohn Lewis, Portfolio ManagerJohn Lewis, Portfolio Manager
-Arrow Alternative Solutions FundBill Flaig, Portfolio Manager
Financial professional use only. Do not distribute to the public.2
•Q&A
Investor Behavior
Euphoria
Excitement
Optimism
Anxiety
Optimism
Desperation Hope
Panic
Financial professional use only. Do not distribute to the public.3
Return Factors
Absolute ReturnsRelative Returns VS Absolute ReturnsSeeks to achieve positive returns without regard to
Relative ReturnsSeeks to achieve
returns that are better
VS
returns without regard to a benchmark
returns that are better than a benchmark
The measure of success is relative only to the
A negative return is considered good if it is
investment objective“less negative” than the benchmark
Financial professional use only. Do not distribute to the public.4
Sector Relative Strength
1999 2000 2001 2002 2003 2004 2005 2006 2007Consumer DiscretionConsumer
Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecom Services
Utilities
Sector Rotation 33.3% 20.5% (13.2%) (12.3%) 26.9% 14.2% 15.3% 15.5% 16.9%
S&P 500 21.0% (9.1%) (11.9%) (22.1%) 28.7% 10.9% 4.9% 15.8% 5.5%
Financial professional use only. Do not distribute to the public.5
Outperformed Underperformed
Source: Morningstar, December 2007Past performance is not indicative of future returns.
Investor Behavior
Many investors attempt to time the market
Financial professional use only. Do not distribute to the public.
by buying and selling at the wrong time.
6
Relative Return: Sector Rotation
Bear Market(Apr 2000-Mar 2003)
Bull Market(Apr 2003-Mar 2006)
Consumer Discretion (13 8%) 15 0%Consumer Discretion (13.8%) 15.0%Consumer Staples 5.7% 10.7%
Energy (3.2%) 33.0%Financials (3 3%) 19 0%Financials (3.3%) 19.0%
Health Care (0.3%) 7.6%Industrials (10.9%) 21.6%
Information Technology (37.8%) 16.8%gy (37.8%) 16.8%Materials (4.5%) 23.7%
Telecom Services (32.5%) 17.4%Utilities (11.6%) 23.2%( )
Sector Rotation (7.4%) 23.4%
S&P 500 (16.1%) 17.2%
Financial professional use only. Do not distribute to the public.7
Outperformed Underperformed
Source: Morningstar, December 2007Past performance is not indicative of future returns.
Return Factors
Absolute ReturnsRelative Returns VS Absolute ReturnsSeeks to achieve positive returns without regard to
Relative ReturnsSeeks to achieve
returns that are better
VS
returns without regard to a benchmark
returns that are better than a benchmark
The measure of success is relative only to the
A negative return is considered good if it is
investment objective“less negative” than the benchmark
Financial professional use only. Do not distribute to the public.8
Create Absolute Return Opportunities
Simultaneous L/S Strategies provides potential
Financial professional use only. Do not distribute to the public.
Simultaneous L/S Strategies provides potential opportunities in both stages of the cycle
9
What Are Absolute Return Factors?
Equities Fixed Income Futures
Long/Short Value High Yield Credit SpreadsLong/Short Commodity Sector
Relative Strength
Long/Short Growth Asset Backed Credit SpreadsLong/Short Financial Futures
Relative Strength
Long/Short Relative Strength Corporate Credit SpreadsLong/Short Currency Relative
Strength
Long/Short Capitalization Emerging Market Credit Spreads Currency Yield Arbitrage
Long/Short Sector Relative Strength
Term Spreads
Long/Short Mean Reversion
Merger Arbitrage
Volatility Arbitrage
Financial professional use only. Do not distribute to the public.10
What Are Absolute Return Factors?
Equities Fixed Income Futures
Long/Short Value High Yield Credit SpreadsLong/Short Commodity Sector
Relative Strength
Long/Short Growth Asset Backed Credit SpreadsLong/Short Financial Futures
Relative Strength
Long/Short Relative Strength Corporate Credit SpreadsLong/Short Currency Relative
Strength
Long/Short Capitalization Emerging Market Credit Spreads Currency Yield Arbitrage
Long/Short Sector Relative Strength
Term Spreads
Long/Short Mean Reversion
Long/Short Sector Relative Strength
Merger Arbitrage
Volatility Arbitrage
Financial professional use only. Do not distribute to the public.11
Research Point: Relative Strength
Financial professional use only. Do not distribute to the public.Source: Arrow Funds, December 2007Past performance is not indicative of future returns.
12
Segmenting Relative Strength
18%
Relative Strength Performance Quartiles: August 1927 to December 2007
12%
14%
16%
6%
8%
10%
2%
4%
6%
0%
Q1 Q2 Q3 Q4 Mkt
Financial professional use only. Do not distribute to the public.Source: Arrow Funds, December 2007Past performance is not indicative of future returns.
13
Absolute Return Structures
150%
250%
200%
MarketNeutral
Gross Exposure
Long ExposureQ1
100%
50% AssetsNet Exposure
0%
Short ExposureQ4
‐50%
‐100%
Long & Gross Exposure
200%
250%
150%
100%Long &Short
Long ExposureQ1
Short Exposure
AssetsNet Exposure
50%
50%
100%
0%
Financial professional use only. Do not distribute to the public.
pQ4
‐100%
‐50%
14
Research Point: Risk Adjusted Benefit
18%Relative Strength Performance Quartiles: August 1927 to December 2007
12%
14%
16%
4%
6%
8%
10%
0%
2%
4%
Q1 Q2 Q3 Q4 RF Mkt M/N L/S
15.3% 10.9% 9.3% 7.0% 3.7% 10.2% 10.3% 16.6%18.7% 18.9% 20.3% 21.3% 0.9% 19.2% 13.6% 17.7%91.1% 94.6% 94.5% 93.1% ‐1.8% 100.0% ‐20.5% 32.6%Correlation
ReturnRisk
Financial professional use only. Do not distribute to the public.Source: Arrow Funds, December 2007Past performance is not indicative of future returns.
15
Research Point: Consistent Preservation
Bear Market Bull Market 6‐Yr Range
Apr 2000 ‐ Mar 2003
Apr 2003 ‐ Mar 2006
Apr 2000 ‐ Mar 2006
S&P 500 ‐16.1% 17.2% ‐0.8%Sector Rotation ‐6.3% 19.0% 5.6%Market Neutral 8.2% ‐1.6% 3.2%Long/Short 2.8% 6.3% 4.5%
Bear Market Bull Market 6‐Yr RangeOct 1971 ‐ Sep 1974
Oct 1974 ‐ Sep 1977
Oct 1971 ‐ Sep 1977
S&P 500 ‐10.6% 20.0% 3.6%Sector Rotation 8 7% 28 0% 8 1%Sector Rotation ‐8.7% 28.0% 8.1%Market Neutral 12.4% 15.9% 14.1%Long/Short 4.5% 28.0% 15.7%
Bear Market Bull Market 6‐Yr RangeJul 1929 ‐ Jun 1932
Jul 1932 ‐ Jun 1935
Jul 1929 ‐ Jun 1935
S&P 500 ‐42.4% 39.3% ‐10.4%Sector Rotation ‐32.2% 37.0% ‐3.6%Market Neutral 32.4% ‐14.3% 6.6%
Financial professional use only. Do not distribute to the public.
Market Neutral 32.4% 14.3% 6.6%Long/Short 11.1% 4.5% 7.7%
Source: Arrow Funds, December 2007Past performance is not indicative of future returns.
16
Research Point: Consistent Compounding
1 Year 3 Years 5 Years 10 Years 20 Years 30 Years 40 Years 50 Years 60 YearsS&P 500 5.5% 8.6% 12.8% 5.9% 11.8% 13.0% 10.5% 11.0% 11.9%Sector Rotation 13.3% 15.4% 15.1% 13.7% 17.6% 18.3% 15.2% 16.3% 16.6%Market Ne tral 17 7% 14 6% 3 2% 10 6% 11 6% 12 0% 11 4% 11 5% 11 3%
Financial professional use only. Do not distribute to the public.
Market Neutral 17.7% 14.6% 3.2% 10.6% 11.6% 12.0% 11.4% 11.5% 11.3%Long/Short 22.4% 20.5% 9.1% 15.7% 18.2% 18.1% 16.1% 17.1% 17.3%
Source: Arrow Funds, December 2007Past performance is not indicative of future returns.
17
Research Point: Diversification Benefit
As of
Strategic Portfolio
Strategicw Sector Rotation
Strategicw Market Neutral
Strategicw Long Short
Return Risk Return Risk Return Risk Return Risk1 Year 6.08% 5.86% 7.51% 6.69% 8.35% 4.65% 9.25% 5.78%
3 Years 7.01% 4.99% 8.68% 5.99% 8.57% 4.14% 9.72% 5.39%
As ofDec 2007
5 Years 9.43% 5.72% 10.58% 6.45% 8.35% 4.42% 9.55% 5.54% 10 Years 6.20% 9.01% 7.76% 10.03% 7.26% 7.35% 8.30% 9.05% 20 Years 10.33% 9.35% 11.81% 10.32% 10.76% 7.78% 12.08% 9.38%30 Years 11.41% 10.85% 12.84% 12.15% 11.68% 9.27% 12.94% 11.17%
Sector Market Long
30 Years 11.41% 10.85% 12.84% 12.15% 11.68% 9.27% 12.94% 11.17% 40 Years 9.68% 11.00% 10.84% 12.23% 10.21% 9.23% 11.14% 11.11% 50 Years 9.42% 10.39% 10.86% 11.61% 10.01% 8.71% 11.11% 10.52%
Equities48%
Bonds32%
Sector Rotation
20%
Equities60%
Bonds40% Equities
48%Bonds
32%
Market Neutral
20%
Equities48%
Bonds32%
Long Short20%
Financial professional use only. Do not distribute to the public.Source: Arrow Funds, December 2007Past performance is not indicative of future returns.
18
Creating Absolute Return Strategies
1. Identify a Universe 2 Segment the Universe2. Segment the Universe3. Construct a Portfolio of Top & Bottom Tiers
• Market Neutral• Absolute Return Strategy
Tools to Segment Sector UniverseTools to Segment
• Technical Research
F d l R h
Sector Universe
• Stocks
h ( )• Fundamental Research
• Quantitative Research
• I-shares (DJ Sector ETFs)
• ProShares (DJ Sector ETFs)
Financial professional use only. Do not distribute to the public.19
Arrow DWA Balanced FundTactical Approach for Broad Market Exposure
Performance ReviewJohn Lewis, Portfolio Managerg
Financial professional use only. Do not distribute to the public.20
DWA Balanced Fund: Performance
Performance displayed represents past performance which is no guarantee of future results The maximum sales charge for A-shares is
Financial professional use only. Do not distribute to the public.Source: Morningstar and Arrow Funds December 2007
Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A shares is5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares held lessthan 30 days. The Funds Annual Operating expense is 2.01%
21
DWA Balanced Fund: HoldingsAs of 12/31/2007
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DWA Balanced Fund: Strategy Breakout
Q4 2007 Style Sector International Fixed Income Alternative Arrow DWA Rotation Rotation Rotation Rotation Rotation Balanced Fund
Strategy 0.94% 1.54% ‐0.36% 3.85% 9.88% 2.94%
S&P 1500 S&P 500 MSCI EAFE LB AGG S&P GSCI Fund BenchmarkBenchmark ‐3.38% ‐3.33% ‐1.70% 3.00% 11.64% ‐0.90%
2007 Style Rotation
Sector Rotation
International Rotation
Fixed Income Rotation
Alternative Rotation
Arrow DWA Balanced Fund
Strategy 7.33% 16.90% 30.55% 6.59% 15.91% 15.29%
S&P 1500 S&P 500 MSCI EAFE LB AGG S&P GSCI Fund BenchmarkBenchmark 5.47% 5.49% 11.63% 6.96% 32.67% 6.08%
Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A-shares is5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares held lessthan 30 days. The Funds Annual Operating expense is 2.01%
Financial professional use only. Do not distribute to the public.
Source: Morningstar and Arrow Funds December 2007
23
Arrow DWA Balanced FundSeeks Absolute Returns With Targeted Risk
Performance ReviewBill Flaig, Portfolio Manager
Financial professional use only. Do not distribute to the public.24
Alternative Solutions Fund: Holdings (12/31/07)
Financial professional use only. Do not distribute to the public.
Source: Arrow Funds December 2007
25
Fund Performance
Arrow Alternative Solutions FundAverage Annual Total Returns
As of 12/31/07
CLASS 1-MonthSince
Inception(10/31/07)
A Shares 2.1% 2.3%
AdvisorShares 2.3% 2.3%
Fund Benchmark 0.32% -0.68%
Cat: Long/Short -0.13% -1.35%
Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A-sharesis 5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares heldless than 30 days. The Funds Annual Operating expense is 1.52%
The Fund benchmark is blend of three Credit Suisse/Tremont Hedge Fund Indices: 33.3% Long Short Equity, 33.3% FixedIncome Arbitrage and 33.3% Managed Futures Indices. The Credit Suisse/ Tremont Hedge Fund Indices are the asset-weighted benchmarks of hedge fund performance. It is not possible to invest in indexes which are unmanaged and do not
Financial professional use only. Do not distribute to the public.26
g g p p gincur fees and charges.
Disclosure
An investor should consider the Fund’s investment objective, risks, charges, and expenses carefullybefore investing or sending money. This and other information about Arrow Funds is contained in thefund’s prospectus, which can be obtained by calling 1-877-277-6933. Please read the prospectus carefullyb f i ti Th A i di t ib t d b A i F d Di t ib t LLC b FINRA/SIPC
The Arrow DWA Balanced Fund may invest in commodity related securities which may be subject to greater volatility thaninvestments in traditional securities. The Fund may invest in international and emerging market securities which may besubject to special to risks including fluctuations in currency government regulation differences in accounting standards and
before investing. The Arrow is distributed by Aquarius Fund Distributors, LLC member FINRA/SIPC.0211-AFD-2/27/2008
subject to special to risks including fluctuations in currency, government regulation, differences in accounting standards andliquidity. The Fund may invest in small-cap securities which may have special risks associated including wider variations inearnings and business prospects than larger, more established companies. The Fund may invest in real estate relatedsecurities which may be subject to mortgage-related risks and real estate market fluctuations. The Fund may invest in fixedincome securities which are subject to risks including interest rate, credit and inflation risk. The Fund is non-diversified asthere are a limited number of underlying funds available and each holding has the potential for a greater impact on theFund’s return. However, the underlying funds have access to a large number of different investments providing theadditional diversification benefits discussed in the presentation. The Arrow Alternative Solutions Fund may not besuitable for all investors. The fund’s use of derivatives such as futures, options and swap agreements may expose the fundto additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives. Investingin leveraged instruments will magnify any gains or losses on those instruments. Investing in commodity and currency
l t d iti b bj t t t l tilit th i t t i t diti l iti Th f d' f h trelated securities may be subject to greater volatility than investments in traditional securities. The fund's use of shortselling involves increased risks and additional costs. Investing in small-cap securities, may have special risks associatedincluding wider variations in earnings and business prospects than larger, more established companies. The Fund mayinvest in fixed income securities, which are subject to risks including interest rate, credit and inflation.
The maximum sales charge for Arrow’s A shares is 5 75% A share investors may be eligible for a reduction in sales
Financial professional use only. Do not distribute to the public.27
The maximum sales charge for Arrow s A-shares is 5.75%. A-share investors may be eligible for a reduction in salescharges. The Fund charges a fee of 1.00% on redemptions of shares held less than 30 days. The Arrow DWA BalancedFund’s annual operating expense is 2.01%. The Arrow Alternative Solutions Fund’s annual operating expense is 1.54%.
Arrow Contact Information
Steve TopleyMid-AtlanticMid Atlantic(215) 348-1529
Day ThomasySouth Midwest(210) 695-8542
Gary GarciaMountain(303) 329-2679 ( )
All other territories…
Jake Griffith, Director of SalesJohn LabadiniInternal Sales
Financial professional use only. Do not distribute to the public.
Jake Griffith, Director of Sales(301) 260-0163
Internal Sales (617) 259-1633
28
Fund Performance
Arrow DWA Balanced FundAverage Annual Total Returns
As of 12/31/07
CLASS 1-Month 3-Month 1-Year
Since Inception(8/7/06)
A Sh 1 19% 2 94% 15 29% 17 72%
As of 12/31/07
A Shares 1.19% 2.94% 15.29% 17.72%
AdvisorShares 1.04% 2.74% 14.28% 16.77%
Fund Benchmark -0.30% -0.90% 6.08% 10.55%Benchmark
Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A-sharesis 5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares heldless than 30 days. The Funds Annual Operating expense is 2.01%y p g p
The Fund benchmark is a blend of two indices: 60% S&P 500 and 40% Lehman Aggregate Bond Index. The LehmanBrothers U.S. Aggregate Bond Index is an unmanaged index composed of investment-grade securities from the LehmanBrother Government/ Credit Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index. The S&PIndex is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common
Financial professional use only. Do not distribute to the public.29
p y g , gstock prices. It is not possible to invest in indexes which are unmanaged and do not incur fees and charges.
Fund Performance
Arrow Alternative Solutions FundAverage Annual Total Returns
As of 12/31/07
CLASS 1-MonthSince
Inception(10/31/07)
A Shares 2 1% 2 3%
As of 12/31/07
A Shares 2.1% 2.3%
AdvisorShares 2.3% 2.3%
Fund Benchmark 0.32% -0.68%Benchmark
Cat: Long/Short -0.13% -1.35%
Performance displayed represents past performance, which is no guarantee of future results. The maximum sales charge for A-sharesis 5.75%. A-share investors may be eligible for a reduction in sales charges. The Fund charges a fee of 1.00% on redemptions of shares heldless than 30 days. The Funds Annual Operating expense is 1.52%
The Fund benchmark is blend of three Credit Suisse/Tremont Hedge Fund Indices: 33.3% Long Short Equity, 33.3% FixedIncome Arbitrage and 33.3% Managed Futures Indices. The Credit Suisse/ Tremont Hedge Fund Indices are the asset-weighted benchmarks of hedge fund performance. It is not possible to invest in indexes which are unmanaged and do not
Financial professional use only. Do not distribute to the public.30
g g p p gincur fees and charges.
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