Rex Macey says his investing is rooted in asset allocation strategies.

"You can control risk easier than you can control returns. So by using the right asset allocation models, you can manage portfolios much more effectively to target long- and intermediate-term investment goals," said the chief investment officer at Wilmington Trust Investment Management.

The Atlanta-based firm serves ultra high net worth investors and institutions. It manages some $36 billion in assets. As of Jan. 31, WTIM had about $2 billion of assets under management using exchange-traded funds.

"We aren't day traders, so the intraday liquidity of ETFs isn't that important to us. But as asset allocators, we like their index-hugging characteristics and low expenses," said Macey.

With billions of dollars to invest for clients, he says longer-term liquidity data provided by such transparent investment vehicles is an important feature that is attractive to WTIM's managers.

"I've been using them since SPY [SPDRs S&P 500 Trust] first came out in 1993," said Macey. "Just the sheer size of the market these days indicates that they're becoming more popular with institutional investors."

The 27-year veteran money manager has always been a passive investing enthusiast. But he also believes that making strategic and tactical changes in asset allocation plans can add value. As WTIM's managers see it, the former is more long-term oriented.

Intermediate Signals 

On the other hand, tactical changes involve taking into account intermediate-term signals in the markets. Typically, those come in a time frame of between 18 months to two years, says Macey.

The idea is to provide different allocation strategies for different types of investors. Macey notes that investment horizons, risk tolerances and wealth preservation goals can vary by a wide range within a broad asset allocation philosophy. As a result, the firm has developed several different models for constructing portfolios.

"Our models are quite varied and based on momentum as well as valuation factors," said Macey. "So it can take years before our more strategic plans signal changes might be in order."

WTIM's research team, which numbers more than 40 analysts and strategists, developed a quantitative-based system for monitoring markets. That methodology takes into account some 50 different factors, ranging from earnings-price ratios to dividend yields. "And these are across all markets, so they can be used to compare different asset classes," said Macey. "That's why we have so many."

Right now, WTIM's managers are tilting toward domestic stocks. "Our benchmarks are generally based on Russell indexes," said Macey. "So all things being equal, we'll use the iShares Russell ETFs."

WTIM also subadvises a mutual fund, the Wilmington ETF Allocation Fund (WETFX). It's based on the firm's momentum-based asset allocation models and invests in only ETFs. Heading into this year, the fund's portfolio had:

• Slightly more than 51% in the iShares S&P 500 Growth Index (NYSE: IVW)
• Another 14.4% in the iShares Dow Jones US Real Estate (NYSE: IYR)
• Nearly 14.2% in the iShares Russell 2000 Value Index (NYSE: IWM)
• About 4.7% in the iShares MSCI Emerging Markets Index (NYSE: EEM)
• Roughly 4.7% in the Vanguard Europe Pacific ETF (NYSE: VEA)
• Around 4.7% in the iShares MSCI EAFE Growth Index (NYSE: EFG)

The rest, less than 4% of total assets, was in liquid money market-like funds.

"Our long-term, neutral position is going to favor value. But at year's end, small-caps were slanted towards value and large-caps were tilted to growth," said Macey.

The fund shifted to large growth in August 2007 and small-cap value last September. "We've seen such different weights in terms of financials by cap size. That has made different behavior take place by different sizes of asset classes," said Macey.

Internationally, the firm has favored emerging markets. "But right now, our shorter-term tactical models don't like emerging markets as much," said Macey.

The firm's portfolios using less valuation inputs and more momentum factors like the one publicly displayed through WETFX are also slanting modestly to growth in developed markets outside the U.S.

"Value and growth styles offset each other in the domestic markets," said Macey. "Overall, since we've got a larger allocation to large-caps, globally we've got a tilt to growth."

At the end of 2008, the fund had an annualized turnover rate of around 127%. But Macey says that number can fluctuate greatly depending on market conditions. And since the fund has only been around since 2005, the models that the fund is based on go back a good deal longer.

The growth of ETFs has allowed the firm to expand the modeling work it does. "It's far easier for us to use funds and ETFs to implement tactical strategies than individual stocks," said Macey. "Typically when it comes to our model, we'll have substantial index data that makes backtesting of strategies possible and more plausible than using individual stock data."