A focus on market volatility has become a driving force behind the Direxion/Wilshire Dynamic Fund (DXDWX), according to portfolio manager Cleo Chang.
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 occur during periods of market turmoil, the fund is taking a more diversified, longer-term perspective.
“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 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,” Ms. Chang 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.”
The fund recently 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, was up 40.2% from inception through last Tuesday, compared with a 50.1% gain by the S&P 500.