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.

Built in Risk Control?

The following excerpt is from TrendLogic themselves:

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 holds 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.

What TrendLogic Demonstrates About Trend Following Applications

TrendLogic’s approach is the direct institutional descendant of Donchian’s original insight applied to a different instrument class. Donchian developed trend following for commodity futures in the 1950s through 1970s. TrendLogic extended the same core principle, follow price trends, exit declining assets, increase exposure to rising assets, to mutual funds in 1994. The instrument changed. The methodology did not.

The hot hands effect that TrendLogic identifies is the persistence of momentum in mutual fund performance that academic research has documented across multiple studies. Funds with strong recent performance tend to continue outperforming in the near term. Funds with weak recent performance tend to continue underperforming. This is the equity mutual fund version of the same price momentum that Donchian’s channel breakout system captures in commodity futures. The underlying behavioral mechanism is the same: investors’ slow adjustment to new information and tendency to hold underperforming assets rather than rotate to outperforming ones produces the persistence of performance differences that systematic approaches exploit.

The two 100% cash episodes, August 1998 and June 2002, are the most visible performance points. August 1998 was the Russian sovereign debt default and LTCM crisis. June 2002 was the middle of the technology bear market’s most severe phase. Both were periods when a standard buy-and-hold equity portfolio was experiencing large drawdowns. TrendLogic was in cash. The capital preservation that Donchian built into his approach, which Jerry Parker articulated as the willingness to exit markets entirely when trends reverse, is the same feature that TrendLogic built into its mutual fund rotation system.

Paul Dean’s direct Donchian partnership from 1974 to 1982, and Brent Elam’s 1970 futures trading start, place TrendLogic’s origins in the same cohort that Elam described at the 1979-1980 MAR conference: 16 of 19 early public fund managers traceable to Donchian. TrendLogic is a third-decade continuation of the same lineage.

Frequently Asked Questions

How does TrendLogic apply trend following to mutual funds?

By ranking mutual funds by recent performance, holding up to 20 of the highest-ranked funds in equal proportions, and automatically moving assets from declining funds to rising funds or to cash when market conditions deteriorate. The program reduces equity exposure and increases cash allocation as the index declines from peaks, and increases equity exposure in the highest-ranked funds as the index recovers from bottoms. This is the systematic trend following principle applied to mutual fund selection rather than to individual commodity or currency positions.

What is the hot hands effect and why does TrendLogic rely on it?

The hot hands effect is the empirically documented tendency for mutual fund performance to persist in the near term: funds with recent strong performance tend to continue outperforming, and funds with recent weak performance tend to continue underperforming. This persistence of momentum in fund returns is the mutual fund analog of the price momentum that commodity trend following captures. TrendLogic’s systematic selection of recent top performers exploits this documented persistence rather than attempting to predict which funds will perform well in the next cycle.

Why does TrendLogic move to 100% cash during market downtrends?

Because the systematic rules define exit conditions that remove all equity exposure when the market trend is down, regardless of how long or how far the decline may go. The two documented 100% cash episodes, August 1998 and June 2002, were periods when the market decline was already underway but its ultimate extent was not knowable in advance. The predefined strategy for reducing equity exposure automatically produced cash allocation before the worst of those declines occurred. The capital preservation allows full participation in the next uptrend rather than recovering from a large drawdown first.

Trend Following Systems
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