A: If we find international countries more attractive than domestic, we’ll start by bringing in an international index such as the iShares MSCI EAFE Index. Then we’ll add individual country exposure to “tilt” that index in the direction that T we believe can add return beyond that index. Since we’re not buying individual securities, we look at the overall benchmark first and then make small changes to add value and bring additional return around that benchmark.

Q:  How many ETFs do you usually hold?

A: The number would vary in the range between 15 and 30. We would get to the high end of that range when we’re buying smaller ETFs with lower liquidity. For example, in country-specific allocations, we usually have a core holding and use the countries to tilt the portfolio in the desired direction.

Unlike other active funds, for us it is the degree of the overweight or the underweight that makes the difference, not market timing. Our approach to risk management is more of a dimmer switch rather than a light switch.

Q:  What’s your view on risk control?

A: We start by looking at the volatility of the overall benchmark. We have a tolerance level for the volatility of the entire portfolio, but we also look at the risk at the individual security level to compare it to the historical levels for that individual class or sector. For example, real estate to us is more risky now than it was five years ago. As the individual risk valuations increase, that is balanced in the overall equation with adjustments that we make to the portfolio.

The primary idea is that we use the long-term standard deviation of the asset class and we add our macro view on top. When we are negative, we add volatility expecting more return to justify that position in the portfolio. Another component is a reversal indicator, which means that the greater the spread between the current rate of return of a security and its historical run, the greater the risk is.