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TrendLogic

Donchian Influences: Paul Dean, Brent Elam, Mutual Funds

TrendLogic Associates, Inc. is a trading advisor with strong ties to Richard Donchian. They apply trend following to mutual funds.

Key facts:

  • Average annual return of 18.8% (after fees) since inception.
  • 22.0% average annual return over past five years.
  • Over the past eight years: Held on to gains achieved in up markets. The portfolio is ahead of where it was at the end of 1999. This means the 91% gain for that year has been preserved.

TrendLogic Backgrounds

All 3 men below worked with Richard Donchian:

  • J. Richard Semels, President and CEO. He has been involved in researching, developing and implementing trading and risk management systems for use in the futures and securities markets since 1975.
  • Paul E. Dean, Chairman. Since 1974 when he adopted a technical approach to trading, he has been involved in researching, developing and implementing futures trading strategies and programs based on trend-timing trading philosophy. Between 1974 and 1982, Mr. Dean was the partner of the late Richard D. Donchian, one of the first advocates of the diversified trend-following approach to managed futures.
  • Brentin C. Elam, Vice President, Director of Markets and Trading Operations. Mr. Elam has traded futures professionally since 1970, using and writing computer programs for trading portfolios.

The following excerpt is from TrendLogic themselves:

Built in Risk Control?

Preservation of capital is one of our primary portfolio objectives. During market declines the portfolio automatically moves assets out of declining sectors and allocates the proceeds to stronger sectors, or to cash. Limits placed on special sectors such as precious metal, technology, international, etc. It is dynamic because the proportion of assets allocated to equities and cash change constantly depending on the market direction. By contrast, standard asset allocation programs hold asset classes at fixed percentage levels regardless of market conditions. We can hold up to twenty top performing no-load mutual funds or liquidate all assets to cash. Usually, we are somewhere in between. This approach allows us to seek an optimum portfolio while implementing significant risk controls seeking to preserve capital. Strong market performance of a mutual fund over the recent past tends to persist in the period just ahead. This phenomenon, the so-called hot hands effect, has been observed and proven many times over. The odds favor the continuance of a fund’s good performance for at least a short while. Likewise, weak performance of a fund tends to persist. We were aware when we started in 1994 that most investors give back the gains achieved from the bull market periods, so we built risk control procedures into our portfolio model. Our portfolio has a predefined strategy for reducing equity exposure, automatically allocating assets to cash, early on in a declining market. (One never knows, at the beginning, how long, or how far, a market will decline.) When the portfolio is 100% invested, it hold 20 mutual funds in equal amounts. If the Index begins a decline from a peak, the number of funds that may be held in the portfolio will gradually be reduced. The funds with the lowest rankings (weak performers) will be sold first with the proceeds allocated to cash. The portfolio was 100% in cash just two times in the past, August, 1998 and June, 2002, both following long market downtrends. When the Index moves up from a previous market bottom, the program automatically calls for increasing equity exposure and reducing the percent in cash. As the program increases the number of funds that may be held, the highest ranking funds (best recent performers) will be selected. By contrast, at market bottoms most investors continue to hold cash, weak stocks or poor performing mutual funds left over from the previous bull market. Seldom are these among the leaders of the next bull market. The high ranking mutual funds selected during the new market advance often represent future leading market sectors. We do not attempt to invest at the exact bottom, but rather increase holdings promptly and systematically once a new uptrend is underway.

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