Dynamic Portfolio Allocation Programs

David R. Kern Asset Management offers two categories of investment programs to our clients: Dynamic Portfolio Allocation Programs and Alternative Strategies Programs. The Dynamic Portfolio Allocation Program offers diversified portfolios of securities tailored to individual clients’ risk tolerance levels. The Dynamic Portfolio Allocation Programs are suitable for an investor’s portfolio based on broad diversification and risk objective. The Alternative Strategies are suitable for a portion of an investor’s portfolio as a diversification tool.

• David R. Kern Asset Management
  • Registered Investment Adviser.
  • Investment vehicle designed for active management, allowing unlimited reallocation without transaction costs.
  • Management systems are automated.
  • Electronic trading systems replace emotion with discipline and rules.
  • Proprietary software designed to combine technical analysis, pattern recognition, and sentiment indicators.
• Risk Management Priority
  • All systems designed to minimize downside volatility of the program.
  • At any time, the entire program can be moved to money market funds to avoid market risk, and provide liquidity.
  • Multiple management systems used for each invested position as part of risk management process.
• Experienced Management Team
  • David R. Kern, CLU, ChFC, has experience advising investors and designing individualized investment strategies since 1983.
  • Brian Kern, PhD, has years of experience designing and testing management system automation programs for a scientific approach to investment. He brings a strong academic background in mathematics and designing system algorithms.

Program Objectives are Based on Risk Categories

Dynamic Portfolio Allocation Programs:

A number of Dynamic Portfolio Allocation Programs are available to meet investors’ risk and return objectives. All programs are actively managed using multiple asset classes and position determination strategies. The five programs, described below, are ordered by decreasing risk tolerance. The minimum investment in these programs is $50,000. Past performance is not predictive of results in future periods. Investments are not FDIC insured, nor are they deposits of or guaranteed by a bank or any other entity, and investors may lose money.

1. Aggressive Growth – Suitable for investors who have a high risk tolerance and desire potential for gain in many market environments. Concentrated asset class positions are held where the portfolios are in two or three funds. The emphasis is on appreciation of capital. Short-term volatility is of secondary concern. Most suited for long-term time horizon of 6 or more years.

2. Capital Appreciation – Suitable for investors who have growth objectives. Current income as a part of the total return is of low importance. Suitable for time horizon of 5 or more years.

3. Moderate Growth – Suited for most investors in the moderate risk category who can tolerate some short-term volatility for long-term growth. Emphasis on real growth in assets, with current income as part of the total return of moderate importance. Suitable for time horizons of 4 or more years.

4. Income & Growth – Seventy percent of portfolio in bond rotation system using high yield and U.S. Government bonds. Thirty percent of program in diversified broad market strategies and the real estate sector. Suitable for the time horizon of 3 or more years.

5. Conservative Growth – Suitable for investors who are primarily concerned about short-term volatility, and need to have some growth in their portfolio. Emphasis on income and real growth of principal as part of total return. Suitable for time horizons of 3 or more years.

 

The Active Management Challenge

Changing Marketplace

The investment marketplace is a complex, changing world of choices. Sorting through those choices requires both time and expertise. The myriad of financial products and services can overwhelm even the most savvy investor. Many investors are smart about investing, but do not have the time or resources to track a retirement portfolio, conduct in-depth fund research, choose funds, and make frequent allocation readjustments.

Professional Management

David R. Kern Asset Management programs are designed to provide investment selection and risk management for those investors who do not choose to direct their important investment monies themselves. Our methodology is to back-test computer models based on technical indicators. We believe that time-tested computer-based formulas used for selection are superior to static portfolios subject to the pitfalls of investor psychology. Many investors make decisions based on emotion and have a tendency to chase performance, or they may fail to act due to fear. Many investors don’t have the time, ability, or inclination to survive the roller coaster ups and downs of these markets. We handle the day-to-day concerns of portfolio selection so investors can concentrate on their areas of interest. We monitor portfolios daily and make changes in asset allocation with our flexible portfolio management platforms. We help clients select their appropriate risk level and start them on the road to achieving their long-term financial goals.

Investment Formats

The investment formats we offer are based on a broad selection of asset classes. Our fee-based service seeks to avoid transaction costs or commissions based on transferring investor monies from one fund to another. A broad range of investment selection choices and investor liquidity are primary determinants in the investment platform used for our Dynamic Asset Allocation Programs. Mutual fund families suitable for these strategies include ProFunds, Rydex and Direxion. Investors should review the prospectus of the fund family for risk and expense associated with the funds.

Fund Selection

Management programs derived from the important concepts of Modern Portfolio Theory emphasizing asset class selection and the importance of risk management. The indicators that guide us in fund selection are part of our proprietary management systems, and we use a variety of management systems in order to provide diversification. At any point in time, we may hold multiple asset classes and funds, or be totally in the safety of money market funds, where there is no market risk. Some programs may use leveraged funds for portfolio construction using the concept called Portable Alpha. Some programs may hold short positions (with inverse performance to the underlying index) as the programs seek positive returns in all market environments.

Dynamic Asset Allocation Process

In the early 1950s, Harry Markowitz penned an article for the Journal of Finance called “Portfolio Selection.” This gave birth to what is now known as Modern Portfolio Theory. Traditional asset management, used by pension fund and mutual fund managers, focused on predicting price movements of individual stocks and bonds. Markowitz’s study focused instead on asset class selection processes, giving the concept of diversification highest billing in determining investment outcome. Later studies by Gary Brenson and other colleagues concluded that the asset allocation decision accounted for over 90% of the variation in portfolio return among different managers. They further concluded that individual security selection and the timing of those selections were minor factors in determining a successful portfolio. Most recently, Andrew W. Lo, Professor and Chief Scientific Officer at the MIT Sloan School of Management, summarized practical implications of active management in “The Adaptive Market Hypothesis: Market Efficiency from an Evolutionary Perspective” (Journal of Portfolio Management, v. 30, 15-29. September 2004).

He concluded that to the extent a relationship between risk and reward exists; it is unlikely to be stable over time. Different investment strategies will perform well in certain environments, and perform poorly in others. He indicated that opportunities do exist for arbitrage, contrary to classical efficient market hypothesis theory. He concludes that innovation is the key to survival, and financial survival is the ultimate objective for investors.

Our process follows from the important concepts of Modern Portfolio Theory and The Adaptive Market Hypothesis. Many investment companies promote the idea that holding a static portfolio allocation for the long term offers the best solution for investor success. However, over time, asset classes and management styles are subject to varying demand. Our dynamic asset allocation process is an alternative to the traditional static allocation portfolio by using technical and statistical analysis as the most fundamental form of gauging supply and demand.

Our Philosophy

Our philosophy is that all asset classes fall out of favor at times, and the decline is enough to damage a long-term portfolio’s chance of success. We believe that if an asset class is experiencing a decline in demand, it should be minimized or avoided altogether. The key to long-term success is first to manage downside volatility, and second, to select those investments providing strong demand.

Risk Management

Our focus on risk management follows from our zeal to help investors keep the benefits of their hard work and thrift. This makes our primary objective risk reduction by reallocating into money market funds, or any asset class that may lessen market risk, if it appears that the market will decline. To the extent that we avoid market risk with our active asset allocation programs, this is considered market timing, a risk reduction strategy. We will attempt to re-enter those asset classes with market risk when our indicators provide a buy signal indicating that prices will appreciate.

Our second objective is to select the asset class, and specifically the individual fund, which will provide the best potential for appreciation in value. This management strategy, called Dynamic Asset Allocation, selects from a wide range of mutual funds or separate accounts in variable annuities.

Account Access

David R. Kern Asset Management provides user-friendly access to account values as an ongoing service to investors. Investors can access their accounts through our website after they have obtained a password or directly from fund or variable annuity company websites.

Special Risk Factors

Manager risk.
Investors in these programs are exposed to systems designed by the investment advisor manager. Past performance is no indication that any specific investment will be suitable or profitable for the investor. The future impact of changing fundamental factors in worldwide political and economic events is unknown. The strategies used by the manager in any of these programs may not respond to future fundamental conditions as they have in the past.

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