Some investors tell Mark Armbruster his strategy's boring.

"But I think of it as powerful in its simplicity," said the Rochester, N.Y.-based advisor. "We don't focus on what's proven not to work, like timing markets. We think using decades' worth of academic research stacks the odds in our favor over time."

Armbruster serves as chief investment officer at Alesco Advisors, which manages around $1 billion in stock and bond assets. Most of that business is working with institutions such as corporate pension funds, private foundations and endowments.

But a good deal also involves high net worth individuals. "We've been pleased that people aren't freaking out in the current market conditions," he said. "They're continuing to focus on medium- to long-term objectives and making sure their asset allocations are appropriate to meet those goals."

His firm likes to use exchange-traded funds (ETFs) to help build portfolios. "On the equity side, the majority of our assets are in ETFs," said Armbruster. "All things being equal, we prefer using bond index mutual funds rather than ETFs."

Alesco has tried various bond ETFs in the past. "We do use them, but they're not our first choice because tracking error tends to be quite high in the ETF format," Armbruster noted. "A lot of the bonds that need to be delivered for creation units are less liquid. So the Authorized Participants, who can step in and arbitrage the spread between market price and NAV, aren't willing to do that in bonds a lot of the time."

Only a handful of securities are often available in bond ETF portfolios as well. "Some of the New York state muni bond funds only have 15-20 individual issues in their portfolios," Armbruster said. "The benchmarks for bond ETFs hold hundreds of different issues. So there's going to be tracking error issues just from the fact that bond ETFs have to use sampling techniques to replicate their benchmarks."

As the firm's chief investment officer, he rarely suggests tactical allocation changes. On average, he'll tweak portfolios every two years or so if necessary. But at the end of last year, Armbruster became concerned about valuation levels in real estate investment trusts. "REITs had run up for a number of years and valuations were way above their historical averages," he said. "So we lowered our allocations to REITs. But we didn't get out of the asset class totally."

He prefers Dow Jones Wilshire REIT ETF (AMEX: RWR) and Vanguard REIT Index ETF (AMEX: VNQ). "On average, we went from a 5% weighting down to around 3% of total assets in December of 2007," said Armbruster. "But now that they've corrected, we think REITs are more attractive."

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