Frequently Asked Questions
Do you use mandatory holding periods?
Yes. As the model calculates, it will arrive at a minimum hold period, which is unique to each model. This is the minimum number of days it will hold a fund before it can select another fund. The analysis in part, determines the minimum amount of time an investment in that fund should be held in order to have the greatest chance of showing a profit on that investment.
Minimum hold periods limit whipsaw trading, whereby a mutual fund shows positive performance and then encounters a short-term downward cycle. When an asset class experiences this type of price action, a mandatory holding period can prevent impulsive movements out of a signaled position, when a loss would be guaranteed. Our philosophy is to let the fund manager do what they do best, manage a single asset class. Weathering these short-term downside movements can provide increased profitability and eliminate unnecessary trading.
Minimum hold periods range from sixty to one hundred and thirty five days. Once the minimum hold period is met, the program reanalyzes the entire universe of funds daily, until another fund has a higher score, causing the model to recommend an exchange of the current fund into the new, higher ranked fund. A model may hold a position for an unlimited time period as long as it continues to have the highest score. However once a new fund is recommended, the minimum hold period must be satisfied before a new fund will be recommended.
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How is Dynamic Asset Allocation different from Time Zone Arbitrage or other short-term timing strategies?
Minimum hold periods of 60-135 days used by our models are not disruptive to underlying portfolios unlike the daily trading systems often used by short-term market timers. Time zone arbitrage strategies that try to capture gains based on closing prices from markets abroad are unfair. Robbing the mutual funds shareholders of profits they have earned. Scofield & Company models do not have involvement in either of these unethical, if not illegal strategies. Due to the infrequent exchanges generated by our system, the heightened scrutiny surrounding abusive, short-term market timing and time zone arbitrage will have no impact on our models. Traditional market timing models are predictive in orientation, often overvaluing market stimulus while undervaluing market response. Dynamic Asset Allocation models look only for the market's response as reflected in the share price of mutual funds. Our methodology seeks only to observe, not predict.
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How is this different from portfolio optimization?
Portfolio optimization makes reference to asset allocation models, which are static in nature. These models often seek multi-year performance trends. While these traditional strategies are popular, in our opinion, static allocation models afford investors less protection in falling markets than that offered by Dynamic Asset Allocation. Portfolio optimization strategies are not designed to respond to current market conditions; however they do provide a basic level of discipline and diversification. Since static models maintain a position in virtually all asset classes, they are exposed to asset classes with negative current performance and will remain in these underperforming areas. Dynamic Asset Allocation strategies look to actively identify sectors of the market that are displaying current productivity and offer information that identifies market trends early enough to allow professional advisors to make informed decisions as to current and ongoing allocations for the portfolio. The continuous review of market pricing is what makes the Dynamic Asset Allocation program reactive to trends which vary in range from 60 to 180 days. This style intends to participate in the appreciating sectors, as well as evacuate the sectors that are showing a lack of performance. To maximize the possibility of positive performance, our Dynamic Asset Allocation process will repeat evaluations of the market pricing in intervals of 60 to 180 days.
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What asset classes do you consider?
Since every asset class has performance potential, all asset classes ranging from small cap international growth funds to US Government bond funds and sector funds may be found in a growth model's fund universe. This broad range of investment choices enables our models to capitalize on upward trends in the market, while having several defensive mutual funds to retreat to during a negative equity market environment. In the case of a moderate risk model the most aggressive fund may be a large cap growth fund, with all the other funds in the model's universe offering less risk. Large cap value, balanced funds, as well as all types of bond funds are also appropriate for the fund universe of a moderate risk model. Limiting the funds available to a moderate risk model confines its investment choices to funds of moderate risk or less. A conservative model's fund universe will be predominantly bond funds, both corporate and government bonds of all maturities and durations as well as some conservative equity funds or balanced funds. The conservative equity fund affords the model a potentially profitable alternative to bonds during a rising interest rate environment, when debt-oriented funds may decline in value. All models have money market funds as an investment option. During those unique periods when stock and bond portfolios are not performing well, the money market funds are available to help manage risk. It is important to note that money market funds do not have a minimum hold period and the model may re-enter the market at any time. Each model is designed to choose only one asset class/fund at a time.
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How many exchanges could I expect per model on an annual basis?
A growth model exchanges on average 4-6 times per year. Moderate risk models will recommend exchanges 2-4 times and conservative models exchange 2-3 times per year. Each model will provide notification of possible future exchange dates at the start of each new holding period.
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Do you implement a stop-loss in your investment methodology?
Scofield & Company models do not use a stop-loss. Our analysis has shown that while a stop-loss maybe appropriate for more active investment strategies, they seldom produce performance gains in Dynamic Asset Allocation models. Our risk management is achieved through allocation to out performing asset classes, mandatory holding periods, and the ability to rotate to money market funds when necessary.
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