2 Momentum Portfolio Management Alternatives To MTUM

Summary

• Dual Momentum is a viable investing model vs. using a single ETF, MTUM.
• Relative Strength is a second momentum investing model that has merit.
• Performance data is shown for each model.
• How to provide downside protection when using momentum models.
• Risk Ratio data shows how well portfolios are performing based on the underlying portfolio risk, appropriate benchmark, and a low-risk interest rate.

Photo by SergeYatunin/iStock Editorial via Getty Images

Two momentum models investors can use in lieu of the single ETF, MTUM, are the popular Dual Momentum model and an approach known as Relative Strength or Tranche Momentum. This second model is patterned after the Dual Momentum model, but uses an array of ETFs for additional diversity. The following explanation lays out the two models and how one reviews each on a monthly basis.

Dual Momentum Model

The Dual Momentum model uses only a few securities. U.S. Equities, International Equities, and a Bond ETF are all that are required to implement this investing model. Here is an example of a small portfolio I track using this DM approach.

Investment Quiver

The investment quiver shown below contains five ETFs, but one only needs VTI, VEU, and BND to implement Dual Momentum model. I've added TLT and LQD as two alternatives for times when either U.S. Equities or International Equities are out of favor.

The current Galileo (a real portfolio) is holding 27 shares of VTI and 2 shares of VEU.

Galileo DM Recommendation

To manage these two investing models, I use a spreadsheet known as the Kipling. The following worksheet is set to the DM or Dual Momentum model. See the red arrow on the right. Instead of the common one-year look-back period, I employ a combination using 60- and 100-trading days as shown by the green arrow. If readers have questions related to look-back periods, post a comment and I'll explain testing I am conducting using different look-back periods.

The current DM model recommends investing 100% of the portfolio in U.S. Equities or in this portfolio, VTI.

Galileo Performance Data

How has the portfolio performed over the last four years when using the Dual Momentum model? The Internal Rate of Return is 15.2% while the VTHRX benchmark is 10.6%. I've included several other benchmarks (including the S&P 500) so readers can make additional comparisons.

The Galileo struck a bit of luck-of-review-day fortunes as the February-March review came at a time when the Kipling spreadsheet called for a market exit to avoid the Covid-19 Crash. This coupled with more good fortune as to when to move back into equities. This partially accounts for the strong performance.

Galileo Risk Ratios

Of the risk values I consider most important, three highly valued are: Jensen's Alpha (Jensen - 5.92), Sortino ratio, and the slope of the Jensen (0.32).

Jensen's Alpha is particularly important in that is takes into consideration the Internal Rate of Return of the portfolio, the Time-Weighted Return of an appropriate benchmark, the portfolio risk (beta), and a low-risk interest rate for a short-term treasury. If you wish to learn more about Jensen's Alpha, post a question.

The slope of Jensen's Alpha informs the money manager whether or not the portfolio is gaining ground on the benchmark while factoring in the risk one is taking to achieve acceptable returns.

I've only been tracking these risk ratios since June of 2020 so I'm not quite up to one-year of data.

Relative Strength Model

The second momentum model goes by the title, Relative Strength or Tranche Momentum. The same Kipling spreadsheet is used, but this model holds many more securities. While I use ETFs, money managers can use individual stocks or mutual funds. The model has this flexibility so long as the tickers can be downloaded from Finance-Yahoo.

Investment Quiver for Relative Strength Portfolio

The following investment quiver is constructed using the principles of asset allocation and factor modeling. In the Max AA column, identified by the green arrow, are maximum percentages permitted for each ETF. Those are my percentages and it is assumed each money manager will set these up for their own portfolio.

Should an ETF reach its maximum percentage, the spreadsheet then looks for the highest ranked or high performing ETF and allocates more shares to that high performing security. This continues until all available cash is used.

MTUM is one of the "arrows" within the investment quiver. The following ETFs include critical factors such as value, size, momentum, and quality. Nearly all asset classes are also included among the listed securities.

Millikan BHS Recommendations

Different investing models are available for the money manager. Dual Momentum is one and for the Millikan portfolio I use the Buy-Hold-Sell (BHS) model. Note the red arrow on the right. Once more, I am using a look-back combination with different weights assigned to the different periods.

With the maximum number of assets to be recommended at this time, there are five Buy and two Hold? recommendations. What exactly is a Hold? recommendation? These are securities that require special attention on the part of the manager. While they don't fit the Sell recommendation, they are on the edge of being culled from the portfolio.

Here is how I've been handling Hold? recommendations. Instead of selling immediately, I set Trailing Stop Loss Orders using a percentage that is 1/2 the recommended stop loss percentage. More on this in the next screenshot.

Millikan Manual Risk Adjustments

The following worksheet from the Kipling is where the money manager makes critical decisions.

• I first adjust the SD Multiplier (red arrow) to a value so as to impact the Stop Loss percentage for VTI. Since the market is very high, to reduce portfolio risk, I've adjusted the SD Multiplier so VTI will have a TSLO of 6%. In a "normal" market the percentage is 8.0%. I consider this to be an over-bought market so I lower the portfolio risk.
• The Maximum Portfolio Risk is 10.5%. This is a high percentage. I prefer this to be no more than 6.0%. To counter this high portfolio risk value, TSLOs are set for each security held in the portfolio. For example, a Trailing Stop Loss Order for VTI is set at 6.0% to sell all 60 shares.
• How to handle the 15 shares of VO when VO is one of those Hold? recommendations? For VO, I set a TSLO at 1/2 x 6.3% or rounded to 3% if the broker will not permit fractional percentages.
• Since there is available cash, I check to see which ETF is ranked highest and if the position is full. VNQ is the highest ranked ETF and the recommendation is to hold 89 shares. Since there is insufficient cash to fill this position to 89 shares, I purchase as many as possible. Based on current prices, I should be able to add as many as 35 shares. See the purple arrow column.

Millikan Performance Data

The following data is not quite four years old as this portfolio has been operating since 8/31/2017. With an IRR of 12.1% the Millikan is close to 2 percentage points above the VTHRX benchmark.

Of even more importance, how well is the portfolio performing based on the underlying risk. Check the last screenshot.

Millikan Risk Ratios

The following data is based on a starting date of 8/31/2017 or four months shy of four years.

As mentioned above, I pay most attention to Jensen's Alpha (6.9), the slope of the Jensen graph (0.59), and the Sortino ratio (3.63). I consider the Sortino ratio to be far superior to the Sharpe ratio as the Sortino does not penalize one for upside performance. After all, every investor wants upside volatility.

Readers have two alternatives to MTUM, although MTUM is part of the Relative Strength model. The Dual Momentum model is by far the easiest to implement. With the Kipling spreadsheet, all one needs to do is download prices and the spreadsheet informs the investor where to invest their money. The Relative Strength model requires a few more decisions. However, it provides more risk controls and adds additional diversification. I recommend investors use both models by dividing a larger portfolio into smaller parts.

Analyst’s Disclosure: I am/we are long VTI, VEU, VNQ, QUAL, VOE, VBR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.