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HS Dent’s slogan is “Helping People Understand Economic Change.” What caught my attention was the word “people.” It’s been catching my attention in the media a lot lately: People in financial crisis. Millions of people are facing unemployment and foreclosure. Will people be forced into delayed retirement?

In these uncertain times, Harry S. Dent Jr., economist, author and educator, is reaching out to people with common-sense strategies for financial management such as teaching people how to navigate through the real estate crash; explaining to people the reasons why to save now and how best to do so in this economy; assisting people in finding the right job at the right time; educating people on reducing debt and keeping cash to restore their own balance sheets; and providing people with tools to make wiser investment decisions.

To that aim, Dent studies people—human behavior patterns, demographics and cycles such as spending trends and aging populations—in order to understand the effect people have on the economy and effectively predict those changes so we can manage our finances accordingly, thereby averting major crises in the future. In an extensive interview with EQUITIES, Dent shared with us a bit about his background, his theories and methodology, his past and future forecasts, his books and recent ETF product, much of which is presented here.

The Man – Harry S. Dent Jr.
Dent has been called controversial, engaging, the demographic trends guru, the sage of doom and gloom—quite a spectrum of opinion. He clearly has his naysayers as well as his fans. Dent is the founder and CEO of HS Dent, as well as an economist, author, consultant, speaker and investment strategist. His claim to fame occurred in the late 1980s when he predicted the downturn of the Japanese economy, which was met with much skepticism because Japan, at the time, was in its heyday. He predicted this downturn by using his demographics methodology based on the spending patterns of the baby boomers. Then, in the 1990s, Dent accurately predicted that the Dow Jones Industrial Average would reach 10,000 or higher. Conversely, Dent has had his share of missed calls, most notably his prediction in 2000 of the Dow reaching 40,000. Dent attributes this miss to their prediction on the timing of the bubble boom in the late ’90s. “Frankly, that was one of our basic errors where we said the bubble boom would continue after a correction, but we thought it would be strong in the U.S.—instead, it went to Asia,” Dent says. “It went to housing and real estate, it went to commodities and oil, and all those bubbles are now peaking.”

In 2006, Dent forecast that the DJIA would decline in late 2009 and to as low as 3,800 by late 2012 and that real estate values would decline even further as the country falls into a deep economic depression from 2009 to 2023. He says the greatest damage will occur in the first four years from 2009 to 2012. As occurred in the 1930s depression, he predicts a short recovery from 2013 to 2017 will be followed by another recessionary period from 2018 to 2022. Then, around 2023, he believes the echo boomers spending will initiate a relatively long-term recovery.

Born in 1950 in Berkeley, Calif., Dent maintained an accomplished scholarly record throughout his life, graduating from the University of South Carolina at the top of his class. He would then go on to complete his MBA from Harvard Business School as a Baker Scholar and was elected to the Century Club for leadership excellence. He began focusing on more business management and strategy and went to work for Bain & Company, a global business and consulting firm. During his tenure with Bain, he worked as a consultant with several Fortune 100 companies. “While consulting, I started to see certain indicators,” Dent says, “like the S-Curve and then demographics while talking with large companies and then smaller firms. Based on my experience and observations, by the late ’80s I had developed my own theory of what causes our economy to go up and down. So from that point on, I became an economist of sorts even though that wasn’t my original focus.”

Since 1988, Dent has been speaking to executives, financial advisers and investors around the world. He has also been CEO of several entrepreneurial growth companies and an investor in new ventures. As a frequent speaker on economic trends, Dent educates clients and partners on The Dent Method and provides strategic vision for asset allocation and investment selection.

The Dent Method
Throughout his career as an economic researcher, Dent developed his own system, The Dent Method, for analyzing market directions. His approach focuses on interpreting consumer spending data collected throughout the maturation period of a family. This takes into account the spending habits of a person from his or her youth to retirement, factoring in life stages of having children, buying a house and so on. The Dent Method argues that the age structure of a population has the power to influence consumption demand in a predictable, substantial and consistent manner. The following is a summarized overview of the basics to understanding The Dent Method provided by HS Dent.

Developed by Dent in the late 1980s, his method is a long-term economic forecasting technique based on the study of and changes in demographic trends and their impact on our economy. It works by showing how predictable consumer spending patterns, combined with demographic trends, allow forecasts of the economy years or even decades in advance.

According to HS Dent, The Dent Method offers a unique view of economic forecasting because it suggests that demographics and spending trends affect our economy, stock prices, inflation, interest rates, innovation cycles, new technologies, product and industry trends, real estate, immigration and domestic migration, and new business models for management and organization. This method also claims to show how to recognize and potentially profit from economic cycles, as well as help pinpoint the best careers in growth industries, the best places to live, the hottest potential investment sectors, and the key technologies that will change everyday lives.

Through its Demographics School, HS Dent says that people can “learn where we are headed and how we can weather the storm and come out on the other side stronger, wealthier, and in the best possible position to maximize the opportunities ahead.”

“Our methodology is very common sense,” Dent says. “People grow up and spend more money as they raise families. That’s the biggest single driver of the economy in the United States.” In elaborating on his method using demographics and various cycles, Dent says, “The biggest cycle I originally saw was the spending cycle of the average family, which grows from work-force entry around age 20 into a peak at age 46 and plateaus into age 50. This demographics cycle peaks about every 40 years. We have also developed other cycles that are important. The commodities cycle hits every 29 to 30 years. Housing, real estate peaks every 17 to 18 years. And the economy tends to go through downturns every 10 years in the early part of a decade and every four years on minor cycles. So we’ve identified a lot of cycles that are consistent and repetitive. This information can be used to forecast how spending will change in the years and decades to come. Many economists think it’s the Federal Reserve [System] that drives the economy. They don’t have anything to do with it. They just react. The economy goes down, they stimulate the economy. The economy goes up, they tighten the interest rates. They just react. They don’t drive the economy.”

According to HS Dent, people represent about 70% of the gross domestic product and how people as consumers spend money is the largest influence on our economic health. As larger groups of consumers age and spend more, the economy grows. When large groups in the population pass their peak stage in spending, this leads to less spenders and slows down the economy. The Dent Method contends that economic boom and bust times are determined by demographic factors. Individual spending tends to peak in the late 40s. Thus, aggregate spending should correlate with the size of the late-40s population. When plotted, the estimated size of the late-40s age cohort with the projected year results show a generally rising trend with a number of peaks and troughs because of past variations in birth and immigration rates. So according to the method, the peaks and troughs of these cycles can be forecasted by moving the birth index by the appropriate number of years.

For example, fewer babies were born during the Great Depression than either before or afterward. Thus, you could expect that 48 years later (during the 1970s and early 1980s), there would be a corresponding drop in the number of middle-aged people. Economic boom times show an association with an increasing size of the mid-40s population, and bust times show an association with a decreasing size of this population. The oscillation in the number of middle-agers at their peak spending years is what Dent calls the spending wave.

The Innovation Generation
Dent reasons that every 80 years, or every other generation, an innovative generation is born that revolutionizes technology, introduces fresh social trends and builds entirely new industries from the ground up. The Generation Wave is a forecasting tool HS Dent uses to gain a macro view of these innovators as they move through the stages of life. HS Dent persuades us to believe that this generation fundamentally and predictably impacts every aspect of the economy from inflation to housing starts to stock prices.

A Generation Wave begins with an identifiable surge in the birth index that announces a new generation of innovators. For example, our current Generation Wave, the era of the baby boomers, began when the birth index peaked in the early 1960s. As this new generation ages, it moves through three distinct stages: the Innovation Wave, the Spending Wave and the Power Wave.

The Innovation Wave peaks when this generation enters the work force, generally between the ages of 19 and 22. Its visionaries introduce business ideas that profoundly affect products, technologies, organizations, relationships and values. Their innovations also revitalize the mature, staid economy created by their elders. In the late 1800s, for example, the last generation of innovators invented electrical appliances, telephones, automobiles, airplanes and aspirin, to name just a few key contributions. Today’s generation of innovators has, with the invention of the microprocessor, created a wholesale revolution in how and where we work, live and communicate.

The Spending Wave peaks when the innovative generation reaches the late 40s. Its spending power drives new technologies, exclusive products and specialized industries out of niche markets and into the mainstream. Goods and services that once only the affluent could afford are now within the average consumer’s reach, resulting in a booming economy. Today, for example, everything from personal computers to cell phones to specialty coffee is available to most everyone.

The Power Wave peaks when these innovators enter their 50s and 60s. As they assume positions of corporate power en masse, they stimulate a revolution in business practices that truly exploits the advantages of the new technologies. For example, what the assembly-line production revolution was to the Henry Ford generation, the Internet marketing revolution is to the baby boomer generation today.

As the baby boomer generation reached its peak spending years, Americans profited handsomely from an economic boom that lasted until the housing and stock markets began to crack in 2007. The second phase of what Dent calls the Growth Boom continued until the end of 2007. What was seen between 1998 and 2007 were predictable traits of a booming economy, according to Dent. The introduction of radical new business models accelerated the movement of new technology into the mainstream, productivity was very strong, and inflation settled into low, flat rates.

The next season—where Dent claims we find ourselves currently – is what he calls a Deflationary Shakeout or depression era. In the last 80-year cycle, this occurred from 1930 to 1942. “During this current Deflationary Shakeout, we are seeing a disinvestment of production facilities and labor that were built up in the race for leadership during the Growth Boom,” said Dent. “It is the worst time for employees and most investors, but the financially savvy can do very well.”

To follow is what Dent calls the Maturity Boom, which divides into two distinct phases. During phase one of the Maturity Boom, which he states will begin around 2023, the conformist generation that follows the baby boomers will enter their spending cycle. In the last 80-year cycle, phase one of the Maturity Boom occurred from 1942 to 1958. This season stimulates the economy and sees stable growth by the companies who survived the shakeout. The innovative industries of the previous generation extend into full mass-market saturation. In phase two of the Maturity Boom, which is predicted to begin in the late 2030s and last until the late 2040s, the conformist generation will still be spending at or near their peak. A new generation of innovators will also begin to enter the labor force, leading us directly into the next season of Inflation and Innovation. The cycle is complete and begins again. The generation that follows has its innovators, but overall, such individuals tend to improve and extend the revolutionary changes introduced by their predecessors. Under their guidance, the economy matures and stabilizes, preparing the way for the next 80-year cycle.

THE FORECASTS

Housing, Credit and Unemployment
Dent’s analysis of the housing and banking crises that are most critical strongly suggest that continued high unemployment on a lag to the recovery and rising real estate defaults on an even greater lag are likely to continue to trigger the next banking and economic crisis by the summer of 2010. Rising adverse geopolitical events on his cycle are said to likely kick in, too, between late 2009 and mid-2010, as he has been warning in his published works.

“Twenty years ago, we were predicting that baby boomers would peak somewhere between 2007 and 2009 in their spending,” Dent says. “The current banking meltdown caused this trend to accelerate downward into the greatest credit bubble in history. Housing bubbled first, which we predicted in 2003 to 2005, as well as its subsequent crash. It has since become the greatest housing bubble in history, and it’s still crashing. The banks lent money against housing that doubled in five years from 2000 to 2005, and the banks were already dead. Now it’s just a matter of it unraveling.”

According to recent editions of the HS Dent Forecast newsletter, the biggest ticking time bomb continues to be the rising defaults and foreclosures even as the economy begins to recover. “Foreclosures are just starting,” Dent says. “People are saying, ‘The housing market is going to rebound.’ No it is not. It’s only rebounding temporarily, which we predicted in our latest book, and that we’d see a rally in the stock market in 2009 and housing would start to improve a bit only to crash again because these foreclosures are just going to keep coming. They are going to continue foreclosing on a lag, and that’s the key point. Normally in a downturn, you go down, and then the government or Fed stimulates and you start to recover, but unemployment lags that downturn by seven or eight months. So even though we are seeing a small recovery now, foreclosures and unemployment are going to keep edging up, and it’s going to eventually tip the banking system down again.”

“I hate to say it but the banks are unrealistic,” Dent says. “They’re hoping the economy’s going to recover and the government’s going to make everything OK, so they’re not restructuring home loans as fast as they should. They need to restructure these loans. Commercial real estate is falling faster, credit cards and business loans are just going to keep going bad, and the unemployment report keeps getting worse. If the banking system were not so mortally wounded by these bad loans and toxic assets, all these things would be expected and we could also expect a more normal recovery. However, in our current situation, these loan defaults and foreclosures keep rising even though the economy is struggling to recover, and that will kill the recovery.”

These forecasts garner support from recent research issued by Deutsche Bank titled “Drowning in Debt—a Look at Underwater Homeowners”—where they predict that 48%, or 25 million mortgages, will have negative equity by the end of the first quarter of 2011. That is a potential 80% increase in foreclosures and defaults beyond millions that have yet to enter foreclosure but have already defaulted. “Have the stress tests on banks taken that into account?” Dent asks. “Our leading indicators point upward into May 2010, but rising mortgage defaults are likely to wreck the economy and banking system again by July or August 2010 at the latest.”

Demographic Trends
In Dent’s latest book, The Great Depression Ahead, he says the government did not create this boom; baby boomers did, new technologies did. Both of those long-term trends are peaking and turning down, and now the government cannot prevent the downturn because the cycles are too big. “Japan already tried to do this in the 1990s, and we predicted this in the late ’80s,” Dent says. “People thought we were nuts. We said that Japan would see a 12- to 14-year downturn. People were shocked. But they had the same trends peak almost two decades ahead of us, a huge housing bubble where their home prices and real estate more than doubled in five years, from 1986 to 1991, and then collapsed. Their baby boom peaked ahead of ours because they didn’t have a baby boom after World War II, and their spending trends turned down.

“Our statement today is that you cannot stop a mega-trend this big from going down. You cannot stimulate an economy where most of the people in it are in their 50s and 60s and are saving for retirement over time. They don’t spend money. They don’t need a bigger house. They don’t need to drive their car more because they are no longer carting their kids around to school and soccer practice.”

BEAR-Market Rally or Recovery?
According to Dent, the present bear-market rally has extended further than any bear-market rally in the last century. This rally ultimately is consistent, given application of the strongest stimulus program in the United States and worldwide ever. This rally continues to show the characteristics of a bear-market rally—a nearly straight-up advance with minor pauses and on declining volume. And some of his technical indicators suggest strongly that we are not yet near a top.

The markets keep edging upward, and Dent believes that investors seemingly assume that a recovery will continue until there are signs that something is wrong. He says those signs have not happened yet, although they probably will begin to occur in the coming months, according to his long-term and intermediate cycles. “We hold steadfast that this economic recovery will fail by the summer of 2010 (July to August) due to rising mortgage defaults and/or geopolitical factors,” Dent says. “It is just a matter of when the leading indicators and stocks pick up this reality.”

So how does Dent think we are going to get out of this? What are the indicators he needs to see to believe our economy will truly begin a recovery? “There’s no way around it, the banks are already bankrupt,” Dent says. “They’re going to have to take more foreclosures and more bad debts and be forced to restructure. In that case, they’re going to take more losses, which will only feed the problem—the more houses on the market, the more housing prices are going to go down. We said this back in 2005; the banks are already dead. You don’t lend against real estate values that doubled in five years aggressively at 90% to 100% loans with low teaser rates and come out of this. So what we see happening in the next few years is a big Chapter 11 process. And that’s good. Free-market capitalism is not failing. It went a little too far, but Chapter 11 allows companies that still have potential to grow to restructure their debts and renegotiate with creditors and move forward. That’s a good thing.”

“America has $57 trillion in U.S. debt, and the biggest part of that is $17 trillion in the financial sector—including banks, investment banks and hedge funds—$14 trillion in consumer debt; $11 trillion in corporate; and now, federal with $11 to $12 trillion; and state government another $2 trillion,” Dent says. “We now have 100% of our GDP in government debt much higher than the peak in the 1920s. So we’re going to have to experience a slowdown. We call it winter. We’re going from a fall bloom with glorious red/yellow/orange colors in the leaves to winter, and winter shakes out companies and a lot of excess debt leaving the ones that are going to survive, which clears the field for spring to follow.”

Real Recovery
Dent predicts that we won’t see that spring until the early 2020s. “We see the bottom of this extreme de-leveraging process around 2012 or so, but we won’t come out into the next global boom until 2020 to 2023,” Dent says. “It goes back to the 40-year cycle. The stock market peaked in 1929 and went down into 1942, and then we peaked again in 1968 and went down into 1982. Every 40 years, we have the 12- to 14-year slowdowns in demographics before you go into the next boom. This is why we won’t really go into spring until the early 2020s.”

By the 2020s, Dent believes India will be the leading growth economy in the world—not China. He points out that China’s aging almost as fast as Europe on an approximate 20-year lag. He also predicts that the United States will begin going sideways (on the chart) at that time, compared to Europe, because of strong immigration from younger immigrants with young children. “So the world is going to shift dramatically toward Asia, and the United States is going to be the only semi-strong western power moving forward,” Dent says.

So when does Dent think the United States will really recover, along with the rest of the world? “The first thing that has to happen is the de-leveraging of the banking system,” Dent says. “We laugh when the government says that we’ve avoided the next Great Depression. No, they’ve only made it worse by supporting the banks and major financial companies and only delaying the inevitable. They should be de-leveraging and restructuring debt, and do it quickly. Secondly, I would need to see unemployment around 15%. Those are the two main indicators that will point to a real recovery.

“That’s what happened in the 1930s. The banks failed, stocks bottomed out and unemployment peaked at 25%—the highest level in history. For us, the worst will occur by 2011 to 2013 when the banking system fails and capitulates, restructures and consolidates. Once the banking systems de-leverage, then we can grow again with stimulus programs like infrastructure and start to bring the economy up again.”

Dent says China has been one of the biggest engines of the current rebound because they had strong stimulus, and China still has demographic trends pointing up into 2015 to 2020. “I think China will be the first to rebound, along with India, in this downturn,” Dent forecasts. “They will cushion the downturn somewhat, and they hold the cards on the U.S. dollar.”

The U.S. Dollar
Contrary to other bearish economists who say the dollar is going to collapse, Dent believes the dollar has already collapsed, referring to its 60% decline from the peak in 1985 and down 40% from its secondary peak in 2001. “When we’re in a boom, we borrow more from the rest of the world through our trade deficits and the dollar goes down,” Dent says. “But when we go into a downturn, as happened last year, the dollar goes up. Stocks went down, the dollar went up. So we’re going to de-leverage more credit and more assets than the rest of the world because we had the biggest boom, and that is going to paradoxically destroy dollars in the world system and in the U.S. economy, and deflation instead of inflation is going to cause the dollar to go up. That’s one of the biggest trends we see: Stocks down for the next year, the dollar up.”

That is why Dent recommends investing in the dollar right now. He says that the dollar is currently undervalued, while the European currencies are overvalued. “For a moderate investor, we see 20% gains in the dollar over the next year and see 50% losses in the stock market,” Dent forecasts. “An aggressive investor should be short on stocks here, and I think we are really close to a peak in this bear-market rally. As we said in our latest book—we predicted there would be a bear-market rally into the late summer of 2009—we’re going to see stocks go down again. But the biggest surprise for most is going to be that the U.S. dollar goes up.”

The Dent Tactical ETF (NYSE: DENT)
Besides investing in the U.S. dollar and Treasury bills, Dent also recommends using exchange traded funds to help protect your portfolio. “At least for the next year or so, stocks are going to be down, so aggressive investors can bet against the stock market by buying an ETF like Short S&P 500 ProShares (NYSE: SH), which shorts the S&P 500,” Dent recommends. “We also just launched our own ETF, which is simply a momentum model that will lag about a month but plays both sides of the market. There is no longer a buy-and-hold strategy, so you need to play the ups and downs.”

The Dent Tactical ETF (NYSE: DENT) is managed by HS Dent Investment Management LLC and sponsored by AdvisorShares Investments LLC. The Dent ETF is a “fund of funds,” which means that it seeks to achieve its investment objective by investing primarily in other exchange traded funds—the first of its kind. Some of the numerous advantages of ETFs are said to include operational efficiency, transparency, liquidity and tax efficiency. AdvisorShares’ exemptive relief enables them to pair these advantages with a professional money manager who actively makes decisions for the fund.

“We’re going to have a roller-coaster market for the next 10 to 15 years, so the best thing to do is have a momentum model,” Dent says. “Our model also has protection on the downside where we get out if there’s an 8% drop in any ETF. We don’t add any human judgment other than signaling the broader demographic sectors we want to focus on, which is very broad. It’s that simple.”

“For the first time in our lifetime as baby boomers, the stock markets and real estate are not just going to keep going up,” Dent says. “So we are offering an ETF where our model has already beaten the market on the upside and hopefully will on the downside, as well. It’s an innovative long-term strategy, and we believe ETFs are more efficient than mutual funds, and here’s a way investors can be in different ETFs and play these trends.” (For more information on the Dent Tactical ETF, see the companion piece to this feature below.)

The Books
In his earlier book, The Great Boom Ahead, published in 1993, Dent stood virtually alone in forecasting the unanticipated boom of the 1990s. He has since written several best-selling books, including The Roaring 2000s (1998) and The Roaring 2000s Investor (1999). In his book to follow, The Next Great Bubble Boom (2004), Dent offers a comprehensive forecast for the next two decades and explains how fundamental trends suggest strong growth ahead, followed by a longer-term economic contraction. His most recent best-seller, The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History, published in January 2009, expands on his forecast of a greater economic contraction and takes it even further, calling it a depression lasting well into 2013.

Dent also publishes the monthly HS Dent Forecast newsletter, which offers current analysis of economic and financial market trends to guide its readers in making effective financial decisions. HS Dent also offers a Demographics School program consisting of economic seminars, along with economic special reports and a financial advisers network, all of which are available on www.hsdent.com.

The Mission
For the past 20 to 30 years, Dent has been researching demographic and technology cycles and trends and says that we can see the trends that are going to affect us over our lifetime: our business, our investments and our kids, everything in our lives. “We can’t predict trends exactly in the short term, but we predicted this downturn 20 years ago,” Dent says. “It’s not a surprise to us. It’s like fall going into winter. We just want people to understand that you can see these major trends. In our modern times, we can measure demographics, we can measure technology trends—when they accelerate or decline—so you don’t have to be surprised by a downturn like in the U.S. in the ’30s or Japan in the ’90s.”

“People need to be more defensive in their investments,” Dent advises. “We are in the greatest credit and real estate bubble in modern history and the biggest generation in modern history since the American Revolution—the baby boom is peaking in its spending patterns—and you can’t fight that tidal wave.”

While his short-term outlook is grim, I personally would like to believe that his mission to help people better understand our economy and how it works will ultimately help us all become more aware of our balance sheets by making smarter, educated investment decisions and prepare us a bit better for the future, whatever its outcome. Whether you believe his predictions or not, his arguments are compelling, supported by real data based on real people, like you and me.

Editors note: Rodney Johnson, president of HS Dent, will be the featured keynote speaker at the EQUITIES Winter Discovery Day Conference in Newport Beach, Calif. on Dec. 17, 2009. For more information, please contact us at events@equitiesmagazine.com or visit our website www.equitiesmagazine.com.

Disclosure Note: EQUITIES Global Communications Inc., the publisher of EQUITIES Magazine, is majority owned by Equities Media Acquisition Corporation Inc. Equities Media Acquisition Corporation is a shareholder of Fund.com, Inc., the majority member of AdvisorShares Investments LLC, the sponsor of the Dent Tactical ETF.

The Dent Tactical ETF (NYSE: DENT) was launched on Sept. 15, 2009, on the New York Stock Exchange under the ticker symbol DENT. AdvisorShares Investments LLC, an innovative investment management firm designed to offer actively managed ETFs, is acting as the investment adviser with portfolio management provided by HS Dent Investment Management LLC, an SEC registered sub-adviser.

“What makes AdvisorShares so special,” CEO and founder Noah Hamman says, “is that we package the benefits of professional money management with the benefits of ETFs to give shareholders a better investment option.”

So far, the package seems to be working. Even though DENT is AdvisorShares’ first product and a newcomer on the market, it is already the largest and fastest-growing actively managed ETF, trading more than 1 million shares in the first four days of its launch. ETFs trade in real time and can be bought and sold through any brokerage account.

“We built this product, in part, due to demand from financial advisers for an investment strategy that can react to changing markets,” Hamman says, “but also packaged with the great benefits of an ETF, including liquidity, transparency and tax efficiency.”

The DENT Fact Sheet states, “The investment objective of the Dent Tactical ETF is long-term growth of capital. DENT seeks to achieve its investment objective by identifying, through proprietary economic and demographic analysis, the overall trend of the U.S. and global economies and how consumer-spending patterns may change based on this analysis. Then the portfolio manager implements an investment strategy using ETFs across several asset classes such as domestic and foreign equities, domestic or foreign fixed income or commodities. The portfolio manager systematically selects some of the strongest performing asset classes and invests in the specific ETFs that gain exposure to the target allocation. The portfolio is monitored daily given market changes, and the portfolio can be reallocated at any time using a sell discipline designed to mitigate risk.”

Critics have brought up the notion that this has all been done before when Harry S. Dent Jr., co-manager of the DENT ETF and founder of HS Dent (see cover story), and AIM Investments modeled a mutual fund after his investment philosophies in 1999. The fund raised nearly $2 billion in assets, however it was subsequently folded into another AIM fund in 2005 after performance losses. “The biggest and most important difference is that the DENT ETF is truly being managed by HS Dent,” Hamman explains. “The AIM fund was a licensing-and-research relationship. AIM had the ability to buy and sell securities in the AIM fund regardless of the opinion of HS Dent. AIM began to not implement the suggested changes by HS Dent. Dent learned a valuable lesson never to lend its name to an investment product not actually managed by HS Dent.”

Rodney Johnson, president of HS Dent Investment Management and co-manager of the DENT ETF, says that the need has arisen for investors to look further for opportunities than in the past. He suggests that with easy access to information through the Internet, investors have a broad range of vehicles to choose from, some of which investors may have never considered before, including ETFs. “Times have changed, and we are in a fundamentally different economic season,” Johnson says. “Our backdrop for investing and the recent approaches to investing no longer work. Welcome to the Shakeout economic season. There are rough waters ahead.”

According to Johnson, Dent’s approach has always been to take advantage of the economic season. “As we were in the Growth Season for many years, it would make sense to hold a greater portion of funds in equities whether you were 25 or 65,” Johnson says. “Conversely, in this Shakeout Season, it makes sense to greatly reduce your equity exposure, no matter your age or amount of time remaining until your funds are to be used.”

Johnson recommends that no matter what the economic season, investors should always have their process or method mapped out before they invest the first dollar. He says to ask yourself: “Is your approach proactive or reactive? Have you set stop losses? Do you have a procedure for determining when you will protect gains? These are all part of developing a strategy that will keep you from making decisions in the heat of the moment, when things look darkest or the opportunities seem limitless.”

The DENT ETF follows the same strategy that HS Dent has been using in its own mutual fund, the Dent Strategic Portfolio, since its inception in May 2008. “We can invest in any ETF, in any asset class, and can also hold cash,” Johnson says. “Currencies have not been an area we have typically analyzed, but the extreme nature of the valuations and the ability of investors to easily access the currency markets through ETFs have brought currencies to the fore.”

Having investigated many models and methodologies, HS Dent chose to develop an approach that combines its demographics with a measure of relative strength. The fund managers argue that this allows them to control the potential universe of investments and still have an unemotional, mechanical approach to what they buy and when.

“Because of the structure of the DENT ETF, we have chosen to be more mechanical in our method of investing, which makes us more reactive instead of proactive,” Johnson says. “Our model uses demographics to narrow the list of potential investments but then relies on price action to give us buy/sell signals. This is quite different from a proactive model, which involves estimating when the markets will reach a turning point.”

“In a large investment vehicle like an ETF, it is impractical to make the sort of short-term corrections that are necessary in a proactive model (quickly re-entering a market if an uptrend continues or quickly exiting a market if a recovery fails),” Johnson explains. “From time to time, this will lead to our forecasts, or proactive approach, being at odds with our reactive methodology. However, this will only happen at forecasted turning points. During trends, such as last fall and this spring, our reactive and proactive models were in line in very defensive positions. In late spring and summer, both models were invested. Right now, we are somewhat split as the ETF is 50% cash, 40% foreign equities and 10% U.S. technology, and our proactive models are much more defensive. It is worth noting that even our ETF model, with only 10% in U.S. equities, is very bearish on U.S. markets.”

Some have posed the question that with the daily transparency of actively managed ETFs, why would an investor want to pay for essentially free information and just do what the DENT ETF is doing on his or her own? “It is not practical for most people to visit the advisorshares.com website every day to view the portfolio changes just to save a few basis points,” Hamman says. “In addition, by following the holdings on your own, you will lose the great tax benefits of the ETF structure. Finally, it isn’t a prudent investment decision to buy after the fund has already purchased and pushed the price of the security up or for the investor to come in and sell after the ETF has sold, most likely pushing the price of the security down due to the selling pressure.”

“As for the costs, the ETF is a structure, similar to a hedge fund, a mutual fund or a separate account,” Hamman says. “These structures can be used to offer low-cost passive strategies or higher-cost active strategies. Historically, only passive strategies have been available in an ETF structure. AdvisorShares is one of the first firms to offer active strategies in an ETF structure, so naturally we are the first to have a higher expense ratio. We should point out that our tactical strategy, which can move tactically to cash, is more similar to a hedge-fund strategy, though we charge a far lower fee than the ‘two and 20’ normally charged by hedge funds.”

As of August 2009, the combined assets of the U.S. ETF market were $656.9 billion with positive asset-growth trends. Over the past 12 months, ETF assets increased $70.9 billion, or 12.1 percent. Fund.com, the parent company of AdvisorShares, is looking to open new ETFs and acquire additional feeder funds for its existing ETFs. For more information, visit www.advisorshares.com and www.hsdent.com.

Editors note: Rodney Johnson will be the featured keynote speaker at the EQUITIES Winter Discovery Day Conference in Newport Beach, Calif. on Dec. 17, 2009. For more information, please contact us at events@equitiesmagazine.com or visit our website www.equitiesmagazine.com.

Disclosure Note: EQUITIES Global Communications Inc., the publisher of EQUITIES Magazine, is majority owned by Equities Media Acquisition Corporation Inc. Equities Media Acquisition Corporation is a shareholder of Fund.com, Inc., the majority member of AdvisorShares Investments LLC, the sponsor of the Dent Tactical ETF.