STRATEGY
Like a sailor, we cannot control the waves and wind; we can only adjust our sails.
PRTO’s strategy is built with the Pareto Principle at its core. The Pareto Principle, commonly referred to as the “80/20 rule,” states that roughly 80% of results generally come from 20% of the inputs. It’s observable across many fields and the principle can be applied as a means of prioritizing and focusing on the vital few things (the 20%) that matter most to outcomes. In this manner, the strategy focuses on the core subset of asset classes that drive the bulk of performance and applies systematic risk overlays as a means of managing downside risk in place of the over-diversification seen in standard allocation models, ultimately leading to less noise and improved outcomes.
The fund is constructed in an “all weather” type of approach and seeks to withstand any market environment. We believe the optimal strategy for compounding returns over long periods of time is to minimize losses during large market downturns. To achieve this, the fund employs purely systematic strategies in a trend-following like manner to adjust allocations as economic conditions change.
The fund has the ability to hold exposure to stocks for times when the economy is accelerating and the ability to eliminate exposure to stocks when the economy is contracting. Additionally, as a means of potentially offsetting losses when stocks fall, the fund will counterbalance its equity exposure with other asset classes like treasury bonds (for periods of decelerating inflation or deflation), gold (for periods of accelerating or stubbornly high inflation) and managed futures (for periods of heightened market volatility).
While the fund seeks to reduce drawdowns, it ultimately attempts to eliminate the “left-tail risk” associated with major bear markets in asset classes. The strategies are built to identify longer-term, structural turning points in markets and will usually hold through the typical pullbacks experienced in a bull market.
The fund can be used to complement and enhance standard asset allocation models or simply as an equity replacement that still provides strong growth potential but with less downside risk exposure.
Systematic, Tested Processes
Zero Emotion
Allocations that Adapt as Conditions Change
FAQ
If trading volume is low on a day, aren’t there issues with liquidity?
An ETF’s liquidity is determined by the liquidity of its underlying basket of securities.
Unlike a common stock, an ETF’s liquidity is not determined by its average daily trading volume. Instead, an ETF’s liquidity is primarily determined by the tradability of its underlying basket of securities. In many cases, this can allow an ETF to trade in amounts much larger than its average daily trading volume.
ETF liquidity providers, commonly referred to as market makers, can create and redeem shares directly with an ETF issuer to meet demand from investors. They do this by interacting with the underlying basket of securities held by the ETF. Consequently, price changes of an ETF are generally based on the price and availability of the underlying portfolio rather than the average daily volume of the ETF itself. A quote can be obtained from the market maker to efficiently facilitate larger trade volumes.
Why is the exposure to Small Cap stocks so high? Isn’t that risky?
From a traditional buy-and-hold portfolio perspective it would be considered aggressive/higher risk given that small cap stocks are typically more volatile (i.e. higher beta) than large cap stocks but it’s important to keep in mind that all stock exposure in the fund is managed tactically and systematically. When you do this, the more volatile an asset class is, the better it can work out to tactically allocate to it because you’re trying to ride a large upswing when “in” and attempting to avoid as much of a large downswing when “out.” So, it actually flips the script on traditional portfolio allocation weights.
Is the fund actively trading, rotating in and out of stocks?
No, the frequency of trading is expected to be quite low. The turnover may appear high because when a strategy makes a change a large percentage of the fund can completely exit an asset class, but the actual frequency of changes is expected to be rather low.
Aren’t ETFs only for active traders?
ETFs can be used by active traders but are also great investment vehicles for long-term investors as well. The ETF structure provides tax efficiencies not available to mutual funds which can aid the compounding of returns over time by allowing the active management of a strategy to occur in a tax-friendly manner inside of the ETF. This makes an ETF the ideal structure for an investment strategy like the one used in PRTO.