ROMO: A New Fund in Portfolios

We recently placed several trades in portfolios. This WJNotes discusses one of the new funds we purchased: Strategy Shares Newfound/ReSolve Robust Momentum ETF (Ticker: ROMO). All our portfolios have a targeted balance of stocks and bonds. For example, our moderate portfolio benchmark is a mix of 60% stocks and 40% bonds. That is just a starting point however, and for a variety of reasons the mix changes over time. How we change the mix is very important.

The most common way we change the mix is rebalancing. The mix of stocks and bonds will naturally drift as one side does better than the other. Rebalancing is simply selling the side that performed better and buying the side that did worse in order to return to our starting mix. Rebalancing is the quintessential, “buy low, sell high” strategy. Jason Zwieg, an excellent writer for the Wall Street Journal, discussed rebalancing in his recent column titled “Finding Balance in a Topsy-Turvy Market.” https://www.wsj.com/articles/finding-your-balance-in-a-topsy-turvy-market-11588341602

The opposite of rebalancing would be a strategy called trend following. Rather than selling the winning side to buy the losing side, you do the reverse. As one side does better, you actually buy more of that position, anticipating that the trend will continue. This strategy may seem simple, but there is an enormous amount of research highlighting how a simple trend following strategy can enhance performance and reduce risk. We currently incorporate trend following in portfolios through managed futures mutual funds.

One of the difficulties with a trend strategy is that it typically involves more trading and can be difficult to manage. Fortunately, the teams at Resolve Asset Management and Newfound Research have collaborated to create ROMO, a fund that does this for us.

ROMO is a simple strategy conceptually. The fund follows a decision tree, with the first decision being which has performed better recently, stocks or bonds. Afterwards the fund chooses what type of stock (US, international developed, or International emerging markets) or bond (short term or long term) has done better and buys that market.

Although the concept is simple, the implementation is much more complex. The fund essentially runs this decision tree thousands of times with slightly different parameters, in order to come up with the best mix of these main asset classes. The funds goal is to act as a dimmer switch, slowly changing between stocks and bonds as appropriate. A short video here describes the process.

ROMO, managed futures, and other trend following strategies can reduce risk in portfolios and potentially provide protection in declining markets, but typically require longer term trends (months or years) to be effective. They act as compliments to rebalancing and have provided protection in the recent market selloff. Please contact us if you would like to discuss ROMO or your portfolio.