Ulysses resists the sirens – Oil painting by Herbert James Draper 1909

Trend Concept’s fund managers compare their role to that of Ulysses’ companions: They plug their ears with wax so they can row without being distracted by the siren calls of the markets. Like Ulysses, investors can hear sirens but remain bound to the mast at their own request and thus withstand the temptations of the markets.

INVESTMENT FUNDS

Equity funds

Follow the market in uptrends, switch into the money market in downtrends

To ensure daily availability and be able to respond promptly to market conditions, the TrendConcept system focuses on investment in the most liquid blue chips on the major global indices or the corresponding futures.

This high liquidity means that funds can switch into the money market without difficult whenever our trend analysis indicates that this is necessary. If the fund is appropriately structured, the investment level can also be managed via futures. Economically, the result corresponds to switching to the money market but transaction costs are far lower.

Trend-based portfolio management offers investors the opportunity to increase earnings significantly while protecting their capital. The examples of our strategies outlined here can be adapted to investors’ individual requirements – especially their individual asset allocation preferences. The main features of these strategies compared with traditional active and/or market-oriented management styles are:

  • An objective and systematic approach that excludes forecasts and subjective decisions. Largely independent of individuals.
  • A steady performance; avoidance of major downturns.
  • Lower volatility, reduced probability of losses.

During uptrends, TrendConcept funds follow the market, even though some hedging phases may prove unnecessary with hindsight and result in a slight underperformance. However, the majority of the uptrend is used to generate profits. Similarly, during most of a downturn the fund assets are safely invested in the money market, thus avoiding a significant loss of capital.

This strategy ensures a higher capital base for the next upswing, compared with a strategy that simply tracks the market. In addition, the volatility of such investments is far lower than that of market-tracking strategies.

The result is a higher capital base and lower volatility.

Performance chart for tactical asset management

Phase analysis: Equity market uptrends

Historical calculations and practical experience of fund management show that in most uptrends around two-thirds of the index performance can be achieved. Between April 2003 and 2007 the performance of the DJ EuroStoxx50 was 99%. The TC Aktien Europa equity fund achieved a performance of 68% in the same period.

Chart: Market uptrend

Equity market downtrends

Conversely, TrendConcept’s safety-oriented approach avoids about two-thirds of any downtrend on the equity markets. That increases the equity base available to participate in the subsequent upswing. That is essential to ensure a better and more stable portfolio development. In the 15 months between mid-January 2008 and mid-March 2009 the DJ EuroStoxx50 dropped almost 45% while the TC Aktien Europa equity fund only lost 18% of its value.

Chart: Market downtrend

Historical calculations

Long-term historical calculations confirm the rule of thumb illustrated above: about two-thirds of upward phases are identified correctly and utilised and about two-thirds of downward trends are avoided. These long-term historical calculations confirm the actual performance of the funds managed by us.

The following table for European equities shows that between 1989 and 2009 the system achieved an average outperformance compared with an index-tracking investment of around 3.5 percentage points. At the same time, risk – measured by volatility – was significantly lower: the risk profile of the TC Aktien Europa equity fund was almost 50% lower than that of the Dow Jones EuroStoxx50 index.

Table: Historical calculations

 TC Aktien EuropaDJ ESTX 50 /MSCI
198927,63%22,33%
199013,08%-12,55%
199116,54%4,05%
199212,53%12,77%
199331,04%38,89%
1994-9,17%-7,87%
19957,02%14,10%
199616,64%22,49%
199719,25%36,84%
199810,02%32,00%
199915,59%46,74%
2000-2,94%-2,69%
2001-4,77%-20,25%
2002-18,08%-37,30%
200312,13%15,68%
20042,38%6,90%
200519,63%21,28%
200610,76%15,12%
20072,06%6,79%
2008-22,95%-44,37%
200921,14%21,14%
Rendite p.a.10,63%6,78%
Volatilität p.a.11,77%19,94%

Tactical asset management in downtrends

While an overview of the European and US markets over the past twenty years shows a major bull market, interrupted only by short, sharp downticks, the Japanese market demonstrates how effective a tactical asset allocation can be in a prolonged downtrend. A tactical asset management strategy utilises pronounced market rallies and avoids the majority of downtrends.

The data in Table 2 are euro-based. If the impact of the firm yen is factored out, the performance of the Nikkei index would have been even poorer. The same approach is used for currencies as for securities: the strategy must cushion downward phases while utilising the majority of uptrends. This is essentially achieved by using the same investment strategy as for securities. If necessary, currency risk can be eliminated completely from a fund.

Table: Performance of the TC strategy vs. the Nikkei 225

 TC StrategieNikkei 225
198920,04%17,55%
1990-17,58%-42,30%
19913,76%2,03%
19920,39%-16,59%
199334,12%19,42%
1994-4,54%13,70%
199520,87%-9,83%
1996-8,21%-5,41%
19976,24%-22,61%
1998-8,50%-0,75%
199935,96%79,77%
2000-8,31%-30,33%
2001-5,51%-29,12%
2002-7,77%-23,43%
200313,57%13,59%
Min. Perf. p.a.-17,58%-42,30%
Max. Perf. p.a.35,96%79,77%
Rendite p.a.2,73%-3,91%
Volatilität p.a.11,20%20,86%

Table: TC strategy vs. the Nikkei 225

Tactical asset management in “lean” market phases

It is worthwhile looking more closely at another historical example. During the 1970s the German DAX index basically traded sideways in a broad band of between around 400 and 600 points, but without any clear uptrends or downtrends. TrendConcept therefore investigated how a tactical asset management strategy would have worked in this phase, assuming that the strategy applied the same rules to manage the level of investment in DAX stocks. In the first half of the 1970s market movements were sufficiently pronounced to achieve a good performance both in absolute terms and relative to the index. However, in the second half of the decade there were no usable trend phases. Nevertheless, the results achieved in the first half could be maintained. The significant aspect of these findings is the far higher capital base available in this portfolio to participate in the bull market that started in 1983.

Table: Historical test: TC strategy vs. DAX

 TC StrategieDAX
1970-8,10%-27,83%
19715,90%6,67%
197213,12%13,29%
1973-2,40%-24,70%
1974-2,88%0,09%
197535,04%39,38%
1976-7,75%-9,66%
19773,69%7,92%
19785,60%4,70%
1979-4,90%-13,46%
19801,27%-3,34%
1981-0,89%1,92%
19824,31%12,72%
Min. Perf. p.a.-8,10%-27,83%
Max. Perf. p.a.35,04%39,38%
Perf. 70-82 p.a.2,52%-0,82%
Volatilität p.a.7,57%14,01%

TC Strategie vs. DAX