Reducing Risk Using ETF Portfolios

Globalt President Bill Roach discusses how his firm moved into ETFs and how it uses them.

Reviewed by: Lara Crigger
Edited by: Lara Crigger
[This article appears in our April 2016 issue of ETF Report.]

After the dot-com crash, when many investors were still licking their wounds, Bill Roach and his team at Globalt Investments came up with a plan: ETFs.

Initially, the Atlanta-based firm's investment focus tilted toward large U.S. companies with operations overseas: Indeed, the name Globalt is an acronym for "Global Investment Alternative." But after the dotcom crash, Globalt decided to retool its approach to provide better diversification and downside protection, particularly for its retail clients. That meant relying on ETFs, which were still new and relatively foreign at the time.

In 2002, the firm was acquired by Synovus. In 2003, Globalt launched a suite of all-ETF products called innovatETF Strategies, which blend active management with robust asset allocation models to reduce downside risk and the impact of market volatility. Backed by two years of independent research, it was one of the first such all-ETF product suites to hit the market.

Today Globalt manages roughly $900 million—or roughly half its total assets under management—in its innovatETF Strategies portfolios. "[They've] been the engine of growth for our firm," says Globalt President Bill Roach.

Recently, ETF Report sat down with Roach to discuss how Globalt continues to use ETFs for its clients, including how they're adjusting for recent market volatility and why active portfolio management still matters.

Globalt President Bill Roach

Tell us a little about your background.

I've been in the investment business since 1985. I've got a degree in chemical engineering from Purdue University, and an MBA from Columbia University. I've been with Globalt since 1991.

How do you go from chemical engineering to investing?

It's funny, actually. When I got to Columbia, I went to a Goldman Sachs presentation on fixed-income sales. My first thought was, "Why would I want fixed income? I want variable income!" By the end of the presentation, of course, I realized fixed income meant bonds, and it had nothing to do with your salary. As an engineer, that was a revelation.

Ironically, my first job out of grad school was with Goldman Sachs, in its fixed-income division.

Talk about coming full circle. OK, so tell us a little about the innovatETF Strategies.

We have four primary models: Growth, High Growth, Balanced and Conservative; we also have one for Income Growth.

Our strategies are focused on three things: reducing volatility, minimizing downside risk, and providing a competitive investment return over market cycles. They're really a hybrid of strategic and tactical approaches to asset allocations. So, for example, we can raise up to 40% cash in our portfolios in periods of duress, or when our models point to cash being ranked higher than other asset classes. Our strategy is active in nature: It's not a black box; we're not buy-and-hold. We look at the weight of the evidence.

InnovatETF has been the engine of growth for our firm, and going forward, I think ETFs will be one of the engines of growth for the industry as a whole.

What is it about ETFs that lend themselves so well to growth?

I think it's the fact that ETFs are lower cost compared to mutual funds. They're flexible. They're transparent. And there's been a proliferation in the ETF space: You have 1,800 of them on the market today. With an ETF, you can slice and dice your investment opinion to any form you want.

Who are your main clients?

Our asset base is roughly 55% retail/45% institutional. We think there are lots of opportunities for the institutional space in that GAA/TAA slot. When I think about institutions, they have historically focused less on asset allocation decisions and more on their strategic decisions: You set your portfolio at 60/40 or 50/50 and then you rebalance back, etc. But after we went through the recession of 2008, I think people are starting to realize that, sometimes, just getting out of the market makes the most sense.

So I think asset allocation accounts for 90% or more of investment returns over time. If I get the asset allocation right, then I have a higher chance of providing investment return for my client over time, and we're heading in the right direction.

With so many ETFs on the market nowadays, it's easy to miss the forest for the trees.

Yes, very true—especially given the amount of information available to investors today. There's so much noise that they see and read and hear every day. It's easy to get confused.

In fact, I'd say the biggest challenge in implementing the innovatETF strategies remains education. You still have lots of individual investors and even investors who are on boards at institutions, who only know the minimal amount of information about ETFs and how they work. If you gave a quiz about ETFs to the average retail investor, I think you'd be surprised at how little they know.

Much of that, I'm sure, is either panic or hype.

Exactly. They hear the negative stuff, but they know a lot less about the positives or the intricacies of ETFs. So yes, I think education is still one of our biggest barriers.

The Globalt Team (l to r): Senior Portfolio Manager Carole Cox, Senior Portfolio Manager Kimberly Woody, CIO Gary Fullam, Head Trader Rainey Woody, Trader/Analyst McKenzie Bragg, Senior Portfolio Manager Tom Martin, Senior Portfolio Manager Megan Busby, Portfolio Manager/Analyst Wade Fowler and Chief Strategist Greg Paulette

How do you evaluate ETFs for your portfolios?

We pull from across the broad market of the universe of ETFs. All 1,800 ETFs are on the table, but we typically like to see a history with them. We like to see that they're tradable, with a fair amount of volume, because the problem becomes, in times of duress, can you get out efficiently?

How many ETFs do you typically rely on nowadays?

Typically we're using 16-20 ETFs in a portfolio.

Given the fair bit of volatility we're seeing in the markets, how have you adjusted your ETF portfolios?

Over the last 10 months, we've moved toward de-risking the portfolio. We've done some things to take risk off the table; for example, selling Canada, Singapore and the EGShares Emerging Markets Consumer ETF (ECON | C-52). We really lightened up on small-cap value, high-yield bonds and real estate.

So we've tried to move down the risk spectrum for our four primary models into a more conservative posture; we've also held a bit more cash in this time period. In most cases, we're north of 10% cash; our normal cash position would be closer to 3-5%.

Given where we are in the markets, there's just too much going on, whether it's oil, or Europe, the Middle East, the presidential election or even concerns about domestic consumer spending. You've got very slow economic growth, both domestically and overseas. I actually think we're still seeing a recovery from 2008.

In the last commentary that you sent out to subscribers, it sounded like you remained fairly optimistic about the U.S. economy. Are you still holding on to that optimism?

I'd say we're still optimistic about the U.S. economy, at least as compared to the rest of the world. If you think about it, 30% of the bonds throughout the world are returning less than 0%. So U.S. bonds still look relatively attractive compared to bonds throughout the world. Plus, our economy still looks better than Europe's, or Latin America's—and you just don't know what you've got going on in China. The information is very misleading and hard to verify. So I'd say we're optimistic about the U.S. markets, compared to anything else.

We do think, however, that as we go to the latter part of this year, we'll see improvement in the markets as a whole; in the U.S. markets first, then in the emerging markets toward the back part of this year as well.

Are you holding any alternatives right now?

Actually, we just added the Market Vectors Gold Miners ETF (GDX | C-78).

What do you like about GDX?

If you look at gold miners, they provide a hedge to a market that's been pretty unstable. We think GDX may attract investors as a safe haven. So we've added GDX to the portfolio just recently, while also looking to take a higher position if and when opportunity arises.

What's next for Globalt?

This is a very exciting time for Globalt, in spite of the challenging markets. As ETFs continue to gain ground in the marketplace and become a bigger competitor to mutual funds, I think investor education will be key. We've got a team with more than 20 years' experience working together, and I think more and more people will be interested in using us as an investment option. I'm excited about what the future holds.

Lara Crigger is a former staff writer for and ETF Report.