On the equities side, New Frontier's optimizing techniques are currently overweighting value in large-caps. And in small-cap stocks, its portfolios are doing just the opposite.

"These aren't big overweights at all," said Michaud. "We're finding very small biases right now. Our optimizers are very sensitive to uncertainty in the markets. So it doesn't tend to overemphasize parts of the market that don't have very specific or strong signals."

The firm is also slightly underweighting international stocks compared to domestic stock ETFs. "It's a little bit of a recent phenomenon. We've tended to be a little bit more neutral in the past," said Michaud.

Tweaks Based On New ETFs

The firm tends to make a bulk of its changes at the beginning of the year. It monitors portfolios each month, and usually by midyear, a few other changes are required, Michaud said. "The portfolios don't get turned over completely almost ever," he added. "Tweaks are made from time to time, but this is a low-turnover strategy."

The only times major changes in positions are made come when new ETFs are added. "Over the course of the five years we've been running ETF portfolios, we've typically added two or three new ETFs—normally at the beginning of the year," said Michaud.

For example, ETFs following roughly the same asset classes might be swapped out. That can be a result of better tracking error and better pricing in newer issued funds. But Pioneer will also add new ETFs that open access to different asset classes to broaden their portfolios' broad diversification.

"We're trying to optimally invest in global economic growth on a risk-adjusted basis," said Michaud. "The ETFs we have in our strategy are meant to represent risk factors associated with the global economy."

Those include gold, REITs, commodities and high-yield bonds, among others. "We consider commodities as a way to reduce risk rather than adding to returns," said Michaud. "As long-term investors, we don't have a view on pricing for oil or gold or anything else. But we monitor how commodities are impacting other markets and asset classes."

He added that alternative asset classes such as solar power and clean energy funds are something his analysts are continuing to monitor. But they prefer right now to use commodities in any alternative asset classification.

"We don't have large positions in commodities, but they're very useful for our investors in controlling overall portfolio risk," said Michaud.

Putting It All Together

A key part of maintaining New Frontier's portfolios and adding value over time, he adds, is its patented rebalancing process. It starts with determining all of the possible optimal portfolio points along the efficient frontier at any given time. "We end up creating a distance measure—a need-to-trade probability. If we have a 10% probability, it's probably not enough to trade. If it's 90%, then it probably is a good idea," said Michaud.

That ratio tells New Frontier whether statistically the portfolio it now holds is very similar or very different from the one they'd like to have over time. "It's a very different way of thinking about rebalancing," said Michaud. "It's much different than using calendars or bands and ranges that are commonly used in the investment community."

He believes that the strategy isn't prone to trading as much as most other active managers, though. That's due to the fact that New Frontier considers all of its investments as core. That's different from tactical investors who set up satellite positions that can be traded more often. "They're shorter-term-oriented investments. But all of our investments are made with a long-term focus," he said.

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