The Concept

There are times in the domestic equity markets when growth stocks perform better than value stocks. Conversely, there are other times when value stocks perform better than growth stocks. Similar observations apply to equity capitalizations, with certain periods favoring large cap equities and other periods favoring small cap equities. Furthermore, there are periods when even the best performing equity class will underperform bonds.

Strategy Overview

Our DRIV (Dynamic Rotational Investment Vehicles ) strategy utilizes a rules-based asset allocation process that is built to recognize these market shifts and identify the “in-favor” segments of the equity and bond markets. The strategy focuses on emphasizing the in-favor equity asset class (e.g., Small Cap Value) during bull markets and limits equity exposure during bear markets by rotating into the in-favor bond asset class (e.g., Long-Term Corporate Bonds). This strategy uses ETFs and index funds to eliminate the risk of poor stock or sector selection.

The DRIV strategy is a product of the following observations:

1. Most active money managers do not meet their performance benchmarks over the long term because of their dependence on stock selection. By contrast, DRIV focuses solely on asset allocation, which is the only proven method for adding value to a portfolio.
2. Market information has become increasingly unreliable, making short-term projections nearly impossible to calculate accurately.

   “I don’t anticipate any serious problems… among the large internationally active banks.”
   – Ben Bernanke, Chairman of the Federal Reserve – February 28, 2008

   “I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They're not in danger of going under. I think they are in good shape going forward.”
   – Barney Frank, Chairman of the House Financial Services Committee – July 14, 2008

Unique Features

Dynamic Rotation

DRIV uses proprietary indicators to vary allocations in accordance with long-run trends in the market. DRIV portfolios have the following three dynamic elements:

1. Equity-to-Bonds Rotation – Does it make sense to hold the same percentage of stocks in all market conditions? We don’t think so. DRIV increases equity exposure during bull markets and decreases equity exposure during bear markets.
2. Equity Rotation – For any given market environment, certain equity classes perform better than others. DRIV emphasizes the stronger classes by shifting equity assets accordingly.
3. Bond Rotation – Similar to equities, strength in the bond market cycles among classes over time. The DRIV strategy analyzes corporate versus government bonds, as well as long-term versus short-term bonds, and emphasizes the strongest bond class.

Index Funds

The DRIV strategy utilizes index funds, rather than individual securities, for the following reasons:

1. Mitigate company and sector risk through diversification.
2. Provide lowest cost of investment.
3. Create a portfolio that is strategically balanced between long-term trends and current market conditions.

Strategic Rebalancing

The DRIV strategy uses strategic rebalancing, rather than scheduled rebalancing, to the let market trends run their course. By contrast, scheduled rebalancing tends to add money to poorly performing assets and withdraw money from strongly performing assets.

Comparison to Traditional Approaches

DRIV is different from most traditional forms of portfolio management.

Traditional Portfolio Management	DRIV Characteristics
Subjective decision making Earnings estimates based on short-term projections Valuations based on theory Static allocation Simply based on age and risk tolerance Cling to failing allocations that are tied to investment policies Prescheduled rebalancing	Objective decision making Earnings estimates based on long-term historic norms Valuations based on history Dynamic allocation Considers current vs. historical market trends Allocation determined by rules and market conditions Strategic rebalancing