Using Systematic Relative Strength to Gain International Exposure .

With International stocks on the rise, advisors are looking for ways to increase exposure to international equities.

Using Systematic Relative Strength to Gain International Exposure

By Nasdaq Dorsey Wright /
As the second-longest bull market in history continues its run, the US stock market has been leading the global markets for years. Over the past eight-plus years, we’ve seen US equities hit record highs. At the same time, international markets, and emerging markets in particular, have had a pretty poor stretch. In the past 18 months, however, that trend has begun to shift, and international assets have come back into favor. As a result, many advisors are looking for ways to increase international equities exposure for their clients, both to seek growth and to diversify portfolios that may be overweighted in US equities. One approach to achieving that international exposure is to use an actively managed, systematic relative strength portfolio.

Nasdaq Dorsey Wright currently offers seven Systematic Strength portfolios, and our Systematic Relative Strength International portfolio has performed particularly well, delivering significant outperformance over time when compared to other similar funds. While the most common method for gaining international exposure may be to buy low-cost, market cap-weighted index funds, the performance of this systematic relative strength strategy over time provides a compelling argument for turning to an active approach—especially in the international area.

Choosing the Right Actively Managed Fund

While selecting an actively managed fund may not be as easy as checking a box on a list of popular passive funds, a service like eVestment’s performance database allows advisors to compare hundreds of different strategies, as well as compare the performance of specific funds against the index as well as the peer group. Most reputable fund managers (including Nasdaq Dorsey Wright) share fund data with eVestment to provide advisors with the data needed to evaluate fund performance.

However, when choosing a fund, performance alone doesn’t tell the entire story, which is why it is important not to limit comparisons to long-term returns. The term “active management” does not mean that a fund follows a rules-based process. Funds that don’t have a clearly defined process for what to buy, when to buy, and when to sell specific assets can place the fund’s performance at the mercy of the fund manager’s whims. For that reason, it’s wise to start by identifying which actively managed funds are outperforming, and then take the time to understand how each fund is constructed and if, importantly, if that approach has the potential to perform competitively over the long term.

When evaluating a fund’s construction, pay particular attention to characteristics that can help balance risk and return while effectively managing costs and tax implications, including:

  • Use of American Depositary Receipts (ADRs)
    ADRs represent a bundle of shares in a foreign corporation, but are sponsored and issued by a US bank or brokerage and are traded on the US stock market just like US stocks. ADRs make it easy, efficient, and cost-effective for US investors to access shares in foreign companies by reducing administration costs and eliminating currency exchanges and foreign taxes on each transaction.
  • Diversification
    Funds that utilize a diverse set of equities, including small-cap, mid-cap, and large-cap companies in both developed and emerging markets give the fund manager the flexibility to take advantage of short- and long-term shifts in the market.
  • Systematic Asset Selection
    A systematic, rules-based approach to buying and selling assets within the portfolio removes the guesswork from the process of asset selection. While many fund managers may have a clearly defined approach that dictates when to purchase a particular stock, it is much less common for them to have a clearly defined approach that dictates when to sell stocks that are currently held in the portfolio.

Introducing Nasdaq Dorsey Wright’s Systematic Relative Strength International Portfolios

Using a systematic, predictable process that has not changed since the funds’ inception over a decade ago, the portfolios have delivered very favorable returns compared to the Nasdaq Global ex US Index. Our process is straightforward, and its strength lies in a rules-based approach that uses the power of relative strength to dictate when to buy and when to sell every asset.

The selection process begins with a very broad investment universe of 400 to 500 small, mid, and large cap ADRs. From that, we cull it down to 30 to 40 stocks using relative strength to select the winners based on two key components: sector and stock model. Starting with the 10 broad economic groups—financial, utilities, consumer discretionary, consumer staples, energy, health care, industrials, technology, telecom, and basic materials—we rank each sector using Relative Strength to determine where to overweight and where to underweight.

Next, we look at the individual stocks in our investment universe, assigning a bottom-up score to each one. That relative strength score determines when we buy and, importantly, when we sell. When we buy a security, we buy out of the top quartile of our relative strength ranks. When a security falls out of the top half of the rankings, it is sold and replaced by a stronger stock. It’s that simple. This systematic, disciplined sell strategy is one of the key advantages of the portfolios. Why? Because holding stocks as long as they remain strong and selling them when that strength falters does just as the old adage suggests—water your flowers and pull the weeds—over and over again.

Another important advantage of this approach is its flexibility to overweight or underweight emerging and developed markets. This fluidity has played out in critical ways over the past decade as the strength of each of these key markets has shifted. This evolution of strength is clear in the chart below that illustrates the portfolios’ allocation of emerging markets (in black) and developed markets (in blue since the funds inception in March of 2006.


At the moment, developed markets are particularly overweighted, but our flexible investment process allows us to drill down to identify unique pockets of strength, adjust these allocations in response to current market conditions, and leverage new opportunities to help drive performance.

The past results of that flexible process can be seen when comparing international funds using the eVestment data. As illustrated below, even when international equities were struggling in 2015 and 2016, our Relative Strength International Portfolios continued to perform quite well. As illustrated below, these portfolios not only performed very well in this asset class, but also outperformed the Nasdaq Global ex US Index (NQGXUST) even when the asset class was, on average, underperforming.


Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit

Using relative strength to compare and select holdings, we have seen that the strongest players are often not found in mega cap names, but instead among mid caps and even small caps which are often not the most obvious choices. The chart below illustrates how the portfolios compared to other funds in the peer group over time. Looking at the blue diamonds that represent the performance of our Relative Strength International Portfolios, you can see that these funds consistently appear in the top quartile. Not only do the funds stack up extremely well against other similar funds, but also they have historically delivered a level of performance that has the potential to add tremendous value over time.


As of 12/31/17. eVestment and its affiliated entities (collectively, "eVestment") collect information directly from investment management firms and other sources believed to be reliable; however, eVestment does not guarantee or warrant the accuracy, timeliness, or completeness of the information provided and is not responsible for any errors or omissions. Performance results may be provided with additional disclosures available on eVestment’s systems and other important considerations such as fees that may be applicable. Not for general distribution. * All categories not necessarily included; Totals may not equal 100%. Copyright 2013-2015 eVestment Alliance, LLC. All Rights Reserved.There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities.Past performance 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.

Clearly, like any approach, ours is not fail proof. Not every position works out, and not every stock drives the value and return that its relative strength at a given time would seem to indicate. However, it is the systematic, unchanging process that has driven portfolio performance. While past performance is never a guarantee of future results, since the inception of the portfolios in 2006, the process has remained consistent, systematic, and effective.

As today’s historical bull market continues to age and stagnate, international equities offer growth opportunities that are beginning to lag in the US equities market. At the same time, foreign stocks offer the international exposure investors need to maintain a healthy level of diversification. Using an actively managed, systematic approach based on the power of relative strength, Nasdaq Dorsey Wright’s Systematic Relative Strength International Portfolios is one approach that may help advisors gain the international exposure they seek today, as well as the potential for required to help them reach their long-term financial goals—regardless of which way the market turns tomorrow.

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There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. Dorsey Wright, and its affiliates make no representation that the companies which issue securities which are the subject of their research reports are subject to, or in compliance with certain informational reporting requirements imposed by the Securities Exchange Act of 1934. Sales of securities covered on this site or in this report may be made in only those jurisdictions where such securities are qualified for sale. Investors in securities with values influenced by foreign currencies, effectively assume currency risk, because foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, such securities.
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