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Analyst View / Management Talk Q&A: 
Rotating Strategies
Author: Staff
Last Update: 2:40 PM ET November 21 2011


Portfolio managers have traditionally taken advantage of market volatility by diversifying across various asset classes. Nathan White and his team at Paragon Wealth Management, however, run the company’s Top Flight Portfolio through diversification across various investment styles. Rotating in strategies that do well and avoiding those that come short of expectations helps the portfolio team to balance risks for investors.

Q: What is the history of Paragon Wealth Management?

Dave Young founded what is now called Paragon Wealth Management in 1986. It was originally called The Center for Financial Excellence. The name was changed to Paragon Capital Management in 1993 when he registered with the SEC. It was later modified to Paragon Wealth Management. Paragon is a registered investment advisor located in Provo, Utah. The company actively manages all types of accounts including IRAs, 401(k) Rollovers, and funds held by pensions, foundations, and trusts.

The Top Flight Portfolio was developed on January 1, 1998, which was the culmination of the best models and systems we had used over the preceding years.

Our total assets under management are just shy of $100 million, and Charles Schwab is our main custodian. I have served as the company’s Chief Investment Officer for the last six years.

Q: What is your investment philosophy?

Essentially, we try to identify names that eventually grow up in value. Our overall philosophy is that we are not buy-and-hold investors and we are focused on timing the market.

Q: How do you transform that into a consistent investment strategy?

We diversify by using various strategies rather than just by pure asset classes. The reason why we use various strategies is because we do not know which strategy is going to be working at one point in time.

We look at all the different strategies and incorporate them into our proprietary quantitative models in terms of what we are going to pick and how much exposure we want in the market. However, our primary investment vehicle is Exchange Traded Funds.

We have a two-step quantitative process in place. One set of models identifies what do we invest in - what ETFs or vehicles we want to use. The other set of models takes a look at the market and the overall risk in the market and how much exposure do we want to the market - do we want to be fully invested, 80% or 90% or less.

The current level of exposure that we have in the market is based on the multiple set of data we track from the economy, valuation, market technical indicators and also market sentiment.

We do use momentum quite a bit and it is an important factor in our quantitative strategies. We tend to be trend followers too. We like to deal with issues as they come rather than trying to second guess the market ahead of time. While we never make forecasts, we just go with what the market is giving us at the time.

We primarily use ETFs because we can have access in a more liquid and advantageous way to any area of the market; ranging from commodities, bonds, stocks and financial derivatives.

Q: What drives your asset allocation decisions?

We have two main portfolios – one is called the Top Flight, which is the growth-oriented portfolio, and the more conservative one is called the Managed Income. They are both run in a similar fashion except that the Managed Income fund invests across more conservative asset classes whereas the growth portfolio fund invests across any asset class.

Those are the main portfolios and we use a combination of those, either one or the other, just depending on the risk tolerance.

We do not exclude certain asset classes in our growth portfolio; even government bonds are included in that.

Unlike some of the traditional asset allocators, we will complete asset allocation for the clients and get them into various portfolios depending on their risk tolerance. For instance, if we like industrials, we will overweight that sector in the market at the expense of another one, like consumer staples.

Q: What kinds of ETFs have you invested in?

I would like to use an example from the period when the markets peaked in October 2007, just before we witnessed the financial meltdown. Yet, people started getting nervous as the subprime mortgage lending crisis started surfacing during that period. We were watching that and as the markets started to go negative, we moved out of the market and held a large cash position.

On August 16, 2008, the market rallied during the day, which served as an extreme buy signal for us. We loaded up the portfolios. We bought the ETF QQQ’s and the SPDRs right at that day just to get exposure.

We chose the SPDR, the ETF that tracks the S&P 500 Index, because we wanted some good, broad, and liquid market exposure without a lot of market impact.
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Market data: BATS Exchange. Inc.

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