Introducing the SMI Dynamic Allocation Fund

Mar 1, 2013
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It’s been seven years since SMI Advisory Services (SMIAS) launched the original Sound Mind Investing Fund (SMIFX) to simplify the task of implementing the Fund Upgrading strategy. The immediate popularity of that fund, which gathered more than $100 million in assets in a matter of months, clearly demonstrated significant demand for a professionally-managed approach to this strategy.

Two years ago, the SMI Balanced Fund (SMILX) was launched to offer a similar option to investors desiring a roughly 60% stock, 40% bond mix within their portfolio. (Because SMI Advisory Services, the adviser to the SMI Funds, is a separate entity from the SMI newsletter, the SMI newsletter staff is not authorized to give information about the SMI Funds. For fund information, call 877-764-3863, or visit

This month, SMI Advisory Services (the Adviser) is pleased to announce a similar opportunity for investors interested in having the Adviser manage their implementation of the Dynamic Asset Allocation strategy. The SMI Dynamic Allocation Fund (SMIDX) has been approved and will begin accepting investments on March 1, 2013.*

To properly evaluate a potential role for SMIDX in your portfolio, it’s important to understand both the similarities and differences of this Fund to the newsletter version of the DAA strategy. Here are the main ones.

Similarity: Investing in the same asset classes at the same time

The most important aspect of Dynamic Asset Allocation is being invested in the right asset classes — and steering clear of the wrong ones — at the right times. SMIDX will use the same process as the newsletter to determine which asset classes to invest in (choosing between U.S. stocks, foreign stocks, real estate, gold, bonds, and cash). Given that these "triggers" for switching between asset classes will be the same, and that this is the most important part of the strategy, it’s reasonable to expect that the Fund should follow a similar performance trajectory as the newsletter’s application of the strategy.

Difference: Using different investment vehicles within some asset classes

While the "triggers" will be the same, the "vehicles" used to invest in the various asset classes will be somewhat different. The Adviser has built upon the original research that inspired the DAA strategy and identified a few additional opportunities that the advisor believes will add value to the DAA process. In their testing, these "enhancements" showed the potential to boost long-term performance as well as improve the Fund’s path to safety when markets get particularly volatile. As a result, SMIDX’s implementation of DAA will vary from the newsletter’s in two key respects.

The Fund will own some different investments within the same broad asset classes. For example, when DAA indicates that foreign stocks should be owned, rather than simply own the iShares MSCI EAFE exchange-traded fund as the newsletter does, the Fund will also include some exposure to emerging markets. Likewise, when domestic stocks are owned, a small allocation to a fund (or funds) selected using a Sector Rotation process will be included. There are several of these tweaks to the vehicle lineup that have shown the potential to improve returns.

Within each asset class, rigorously tested mechanical processes will be used to select any investments used to supplement the core DAA holdings newsletter readers are familiar with. Not surprisingly, most of these processes use some form of Upgrading for investment selection. Testing has revealed that some categories benefit more from these enhancements than others, which has been taken into consideration in determining the exact mix of investments for each specific asset class.

Difference: Responding more quickly to changing market trends

While the first difference between the Fund and newsletter versions of DAA focuses on boosting returns, the second is primarily a risk-reduction measure. During the research process, the Adviser discovered an automated approach that allows a quicker flight to safety during periods of dramatic market change.

As long-time Upgraders know, the weakness of most trend-following systems (including Upgrading and DAA) is they are often slow to respond at market turning points. When markets change rapidly, this can mean significant losses can occur before the trailing data shifts enough to trigger a response by the system. While the regular DAA process helps us avoid being in the wrong asset classes over the intermediate- to long-term, the advisor believes this new tool will help speed up the Fund’s response to rapidly changing market conditions, moving its assets to safety sooner.

Difference: The Fund will charge a management fee

One final difference between utilizing SMIDX and managing your own DAA portfolio is the higher expenses fund investors will pay. Either approach involves paying expenses for the underlying DAA investments, but using SMIDX adds a second layer of fees, increasing costs beyond what you would pay to follow DAA on your own. Theoretically, an investor who owned exactly the same investments as the Fund without paying any additional trading costs would outperform it by the amount of its expense ratio, which is capped at 1.45% in the prospectus.

Of course, it isn’t possible for an individual to replicate what the fund is doing in real-time because the needed data won’t be available. The Adviser believes the Fund’s enhancements to standard DAA will offset some (or all) of the additional expense over time. But even if that doesn’t occur, past experience indicates there will be many for whom it’s worth paying a little extra in order to automate their use of the strategy. Those investors will know they are getting timely implementation of the DAA process, insulating themselves from the very real risk of their emotions compromising the application of the strategy, plus getting all of the very best ideas SMI Advisory Services has uncovered in its extensive (and ongoing) DAA research. For these investors, it’s well worth the small additional expense to be free from the responsibility of having to monitor and execute changes in their portfolio every month.

Expect different performance outcomes

While we can’t know how much the enhancements included in SMIDX will impact future performance, we can be reasonably sure they will cause the Fund’s returns to differ from the newsletter’s DAA returns. This will likely be most obvious over shorter-term periods, particularly at times when SMIDX has taken steps to reduce risk more quickly than the newsletter’s portfolio.

Naturally, the Adviser wouldn’t be adding the complexity of these enhancements if testing hadn’t shown they would have added considerable value in the past. But it’s important to understand that the Fund’s performance won’t march in lock-step with the newsletter. Over time, we expect these differences to help offset the additional costs of using the Fund. But on a year-to-year — and certainly month-to-month — basis, they may be confusing to those who don’t understand that the Fund’s specific application of the DAA strategy is considerably different than the newsletter’s.

On the limitations of backtesting

It’s reasonable to be skeptical when presented with strategies based entirely on theoretical backtesting. Given that DAA is a new strategy itself, both the newsletter’s basic approach and the Fund’s enhanced approach are subject to the risk that future conditions may be considerably different than the past. That said, the Adviser’s testing clearly shows these enhancements would have boosted returns and reduced risk in the past when compared to standard DAA. Their expectation that this advantage will be sustainable in the future is based on the fact that, as with basic DAA, these enhancements are generated by mechanical processes that help eliminate judgment calls. The attempt to test as great a variety of conditions as possible and structure all of the mechanical processes with care is our best defense against what is, ultimately, an unknowable future.

Brokerage availability

SMIDX should eventually be available to investors at all brokerages that currently carry the other SMI Funds. However, some brokers (including Fidelity, Schwab, Scottrade, and TD Ameritrade) have changed their policies in recent years to only add new funds based on customer requests. If your broker offers SMIFX and SMILX, but doesn’t list SMIDX yet, give them a quick call to request that they add it by the March 1 opening.

Because SMI Advisory Services, the adviser to the SMI Funds, is a separate entity from the SMI newsletter, the SMI newsletter staff is not authorized to give information about the SMI Funds. Instead, for more information about the SMI Dynamic Allocation Fund (SMIDX), including risks, fees, and expenses, call 877-764-3863 for a free prospectus. Or, download one from the SMI Funds website. Read it carefully before investing or sending money.

Thousands of investors currently enjoy the simplicity and peace of mind of having the professionals at SMI Advisory Services manage their Upgrading portfolios. If you’d like to enjoy those benefits for the DAA portion of your portfolio, the new SMI Dynamic Allocation Fund may be worth investigating.

* Because the SMI Dynamic Allocation Fund (SMIDX) will invest in other ETFs, mutual funds and privately-traded partnerships, it will bear its share of the fees and expenses of these underlying investments, in addition to the fees and expenses payable directly to the Fund. As a result, you’ll pay higher total expenses than you would investing in these instruments directly.

You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Fund before investing. The Fund’s prospectus contains this and other information about the Fund, and should be read carefully before investing. You may obtain a current copy of the Fund’s prospectus by calling 877-764-3863, or you can download one from

Past performance is no guarantee of future results. Your Fund shares, when redeemed, may be worth more or less than their original cost. The SMI Dynamic Allocation Fund can be purchased directly from the distributor (Unified Financial Securities, Inc.) with no fee.

Written by

Austin Pryor

Austin Pryor

Austin Pryor has 40 years of experience advising investors and is the founder of the Sound Mind Investing newsletter and website. He's the author of The Sound Mind Investing Handbook which enjoys the endorsements of respected Christian teachers with more than 100,000 copies sold. Austin lives in Louisville, Kentucky, with his wife Susie. They have three grown sons and many grandchildren.

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