Portfolio Manager Perspectives

Jeff Benjamin

Wilshire's Cleo Chang: Finding opportunity in volatility

Nov 4, 2009 @ 2:25 pm

By Jeff Benjamin

A focus on market volatility has become a driving force behind the Direxion/Wilshire Dynamic Fund (DXDWX) DXDWX

The fund — which re-balances monthly from a starting point of 60% equities and 40% fixed income — has adopted a longer-term risk profile that reflects reduced market volatility.

So instead of riding the waves of investor reaction that typically occur during periods of extreme market turmoil, the fund is now taking a more diversified, longer-term perspective — reflecting the next stage of the market cycle.

“When a crisis hits, as we saw in the fourth quarter of last year, investors tend to abandon what they believe in terms of a long-term risk profile and start acting on emotions,” Ms. Chang said.

The fund's tactical overlay strategy is designed to take advantage of these types of short-term market inefficiencies by moving in stride with overall investor sentiment.

Ms. Chang pointed to the recent outperformance of investment-grade corporate debt as an example of a situation in which the markets were “out of equilibrium,” due to a lack of liquidity in the credit markets.

But as liquidity has started to come back to the credit markets, the short-term advantages of high-grade corporate bonds have started to dissipate.

The fund, which uses some futures and derivatives, and also relies on some leverage to gain its desired exposure, has increased its allocation to global real estate and commodities as part of a more diversified and risk-averse strategy.

“Our philosophy is that over the long term we believe that markets are efficient, and riskier asset classes will demand higher returns while less-risky asset classes will have lower returns over time,” she said. “But over short-term periods the market isn't always in equilibrium, and we want to take advantage of the market inefficiency in a risk-managed manner.”

In recent weeks, the fund has reduced its exposure to domestic investment grade bonds by 2 percentage points and increased its exposure to U.S. Treasuries by 5.5 percentage points.

The net exposure to fixed income is at 62%, while the net exposure to equities is at 52.5%. Exposure to commodities is at 4.5%.

The fund, which was launched March 2 — just a week before the broad equity markets bottomed out — is up 40.2% from inception through yesterday.

This compares with a 50.1% gain by the S&P 500 over the same period.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .

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