Joe Benoit, Grimes & Co.
Risk-Managed Income: Bonds + Options
Joe Benoit is a portfolio manager at Grimes & Company, a registered investment advisor based in the Northeast that manages approximately $3 billion in client assets. Joe's specialty is fixed income, and the firm recently launched their first ETF to bring their bond management approach to a wider audience. On this episode of Behind the Ticker, Joe joins Brad to talk about the transition from managing bonds across thousands of separate accounts to wrapping that same strategy in an ETF, the firm's credit-driven approach to fixed income, and what advisors should be thinking about in the current rate environment.
From $3 Billion RIA to First-Time ETF Issuer
Grimes & Co. has been managing money for decades, primarily through separate accounts and model portfolios for advisors and institutions. Joe explains that the decision to launch an ETF was driven by client demand and the practical advantages of the ETF wrapper. Managing individual bonds across thousands of separate accounts creates enormous operational complexity. Every account needs individual trades, individual tax lot tracking, and individual rebalancing. When you're doing that across a large book, the operational burden becomes the bottleneck rather than the investment process itself.
An ETF centralizes all of that into a single vehicle. Advisors can use it across their entire book with one trade instead of hundreds of individual bond transactions. Joe acknowledges that the SMA approach has real advantages for larger accounts, particularly around tax loss harvesting and customization (excluding specific issuers, adjusting duration for individual needs). But for the majority of advisor clients, especially those with smaller account sizes where buying individual bonds in round lots isn't practical, the ETF provides better access to the same investment process, the same team, and the same research in a more efficient wrapper.
The Fixed Income Investment Process
Joe describes Grimes' approach as fundamentally credit-driven. They're analyzing investment-grade corporate bonds at the individual issuer level, looking at financial health, debt coverage ratios, earnings stability, and the trajectory of credit quality. They're not trying to make big duration bets or time interest rate movements. The focus is on security selection and credit quality, building portfolios bond by bond.
The portfolio construction uses a ladder approach, spreading maturities across the yield curve so that bonds are constantly maturing and reinvesting at current rates. This naturally manages reinvestment risk and provides a steady stream of income without requiring the portfolio manager to make large tactical shifts based on rate forecasts. Joe emphasizes that predicting interest rate movements has humbled some of the best macro investors in the world. By laddering maturities, you sidestep that problem entirely and let the portfolio self-adjust to whatever rate environment develops.
Brad asked about the current environment, with rates having risen significantly from the zero-rate era. Joe sees this as genuinely favorable for fixed income investors for the first time in years. With investment-grade corporate bonds yielding 5-6%, you're getting meaningful real income without stretching into lower-quality credits. He notes that investors who spent the last decade reaching for yield in high yield bonds, preferred stocks, or exotic income products can now find attractive returns in high-quality investment-grade bonds. The risk-reward has shifted decisively back toward quality.
Lessons from the RIA-to-ETF Transition
Joe shared candid insights about what it takes to go from running a successful RIA to becoming an ETF issuer. The regulatory requirements are a different world. Going from managing SMAs with direct custodian relationships and straightforward compliance, to meeting 40-Act requirements with independent board governance, daily prospectus obligations, and daily NAV calculations is a substantial step up in complexity. Grimes worked with experienced service providers to manage the transition, but even with expert help, the learning curve was significant.
Distribution is the other major challenge that Joe highlighted. Running a successful RIA with $3 billion in assets doesn't automatically translate to ETF distribution capability. The advisor channel, institutional buyers, and retail investors all discover and evaluate products differently. Building a distribution strategy requires a different set of skills, relationships, and resources than managing the money itself. Joe says Grimes is in the early stages of that buildout, and he appreciates the honesty of other ETF issuers who've told him the same thing: the investment management is the easy part, the distribution is the hard part.
Key Takeaways
- Grimes & Co. manages approximately $3 billion and launched their first ETF to deliver their fixed income process beyond SMA clients, especially to smaller accounts where individual bond purchasing isn't practical.
- The investment approach is credit-driven, focused on investment-grade corporate bond selection and yield curve laddering rather than duration bets or interest rate timing.
- With investment-grade corporates yielding 5-6%, Joe sees the best environment for quality fixed income in years. Investors no longer need to reach into lower-quality credits for meaningful income.
- The transition from RIA to ETF issuer involves significant regulatory complexity (40-Act governance, daily NAV, independent board) and requires building an entirely different distribution capability.
- For smaller advisor accounts, the ETF wrapper provides access to the same institutional-quality fixed income process as the SMA with dramatically less operational complexity.
Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.
Full Transcript
4,157 wordsMachine transcribed from Brad Roth's conversation with Joe Benoit, Grimes & Co., with speakers identified automatically. Timestamps link to that moment on YouTube. Lightly cleaned, otherwise unedited.
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Welcome to Behind the Ticker. Today we have on Joel Benoit. He is a portfolio manager at Grimes & Company. We are talking about a collaboration therein with Little Harbor Advisors to launch the ETF, the LHA Risk Managed Income ETF ticker RMIF. Really, this ETF was kind of originated out of the response to the post-2008 low interest rate environment, and they are looking for an alternative to core fixed income exposure. And so what they've come up with is a fully tactical and unconstrained approach to fixed income, looking at positive trends in yield and price, and really aiming to generate consistent income while preserving capital and managing that downside risk.
So without further ado, please welcome Mr. Joel Benoit.
Hey, Joel. Welcome to the show. Hey, Brad. Great. Thanks for having me.
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So before we get started, if you could, would you give everybody a bit about your background and how you eventually ended up at Grimes & Company?
Sure. Yeah. So I grew up in Southern New Hampshire, went to college down in Rhode Island, and then majored in finance, and then my senior year in college, just started looking around for a job like a lot of people. I knew I wanted to stay somewhat local to where I grew up, and then interviewed for a bunch of jobs. Grimes was at a point where they were starting to hire and grow a bit more at that point in time. So I interviewed, took the job as a research assistant back then, and then sort of just worked my way up to portfolio management where I am today.
Oh, that's great. Good for you.
So I always like to ask before we get into the nitty gritty stuff, the business stuff, and the ETF, what do you like to do when you're not behind the desk, when you're not working? Any hobbies? Yeah.
Yeah. So I still probably against my wife's wishes. I still do play basketball. So I'm in a men's basketball league. So I still enjoy doing that. That's something I always did growing up through high school, recreationally in college, and then still continue to do. That's not as much as I'd like to. A lot of my time these days, I have two kids, an 11-year-old and a 9-year-old. So most of my weekends are found on a baseball field, soccer field, basketball court, either coaching or just watching them do what they enjoy doing, which is fun to see.
Yeah, that's great. I find myself spending too many hours on the soccer field even now as we head into fall. But yeah, your wife has some merit. I don't know how old you are, Joel, but pick up rec league basketball screams
Knee injury to me. Yeah, yeah. I had a round number birthday this past March. So now that I'm 40, I may be short-lived, but I still enjoy doing it. So it's fun while it lasts. Yeah, good for you.
I was a hockey player and even into my late 20s and early 30s, I said, I'm going to be in the ER. It's probably better for me to just hang it up.
Yeah, that's smart. Yeah.
So why don't we talk about Grimes & Company as a whole? What's the firm's philosophy around investing? How are you guys helping clients? Yeah.
So we are an RA, a registered investment advisor. The firm was founded by Tim Grimes in the 80s. Today, we manage north of $5 billion in total AUM, have probably 55 or so employees. As a discretionary money manager, for a lot of our clients, we manage balanced portfolios. So we have stock strategies, we have fixed income strategies, we manage some alternative strategies. So we try to take, for most of our clients, we try to take a holistic approach. Some clients will hire us just for one area and they've got other people that are taking care of the other sides of their portfolio for them.
But generally speaking, for a lot of our clients, we're trying to be holistic in nature. We have a full financial planning staff in-house that'll do retirement income projections and things like that. And then we have a seven-member investment team here that handles all the investment side. So the investments are centralized here at Grimes through my team. Kevin Grimes is our president and CIO. So he leads my team, but we handle all the investment sides. And we have clients from individuals, foundations, endowments, things like that. That's great.
And so you guys are actually acting as sub-advisor for another firm called Little Harbor Advisors on this particular ETF, which we're going to talk about, which is the Little Harbor Advisors or LHA Risk Managed Income ETF. But can you speak about their firm at all? I was on their website. It looks like they do some cool stuff. It looks like it's a fully tactical investment sub-advisory firm or model delivery. Can you talk about their firm at all?
Yeah. So Little Harbor, geographically, they're somewhat close to us. We're both in Massachusetts. They're headquartered up in Marblehead, which is about an hour away from where our office is. But we were connected with them internally. Somebody that works here had connected with somebody at Little Harbor. And one thing led to the next. They just started talking about their investment philosophy. So they've had some tactical equity ETFs in the marketplace for a little while. And they were looking for somebody to tactically manage something on the fixed income side for them.
And we've had a tactical fixed income strategy for 12, 13 plus years that we've managed internally in client accounts. So that just lended itself to... They were looking for a sub-advisor to launch a tactical fixed income ETF. We had a strategy that we were doing. So it just naturally, I think, made sense for us to partner up and do that together. Yeah.
No, that sounds great. You're actually... I think this is probably by the time we're done getting all the episodes out, episode 60 something. But this is the first sub-advisory relationship that we've had on the show. So if you would, can you talk about how the relationships and general responsibilities work between what does LHA have to do? And what is your responsibility as sub-advisor? Are you just passing on investment allocation and they take care of the rest? Can you talk about how that sub-advisory relationship works? Sure.
Yeah. So I'm sure every relationship is slightly different. The way that we've worked with Little Harbor is before the ETF was launched, all the setup, legal, all that stuff was handled by Little Harbor. There were certainly areas where we had to get involved, but Little Harbor. So they largely handled the setup of the ETF pre-launch. they set up their arrangements with, APs, market makers, trading firms, things like that. Really, all we've had to do by and large is just manage the portfolio. So, when there are trades that we have to do, we are leveraging Little Harbor's trading relationships to execute the trades that we need to do.
So when Little Harbor does marketing efforts that they want to loop the portfolio management team in on, we'll do, webinars, Zooms, things like that with Little Harbor. Little Harbor handles the distribution. So they've got marketing folks that are out there telling the story. So from our standpoint, it was really our investment team here at Grimes just continuing to do what we're doing in many of our client accounts that utilize this strategy just in an ETF wrapper, which was unique to us and something we hadn't done up until that point.
Well, let's talk about the ETF, which is the tickers RMIF, which again is the LHA, Risk Managed Income ETF. Before we kind of get into the nuts and bolts, just at like a high level, what is this fund really trying to accomplish? Yeah.
So we're really, with our risk managed income strategy, we're really trying to accomplish a few main things. we're trying to generate a reasonable level of yield for clients. We're trying to do it while managing the downside risk or preserving capital. And we're trying to do it while also maintaining daily liquidity. the strategy itself really, it sort of was something that we came up with after the global financial crisis in 2008. So at Grimes, for 20 plus years, we had been laddering out high quality individual bonds for clients.
And that worked really, really well for a long time. And, once we entered the post-global financial crisis period, right, interest rates had bottomed out. And, we were just sitting around looking and saying, okay, where can we generate a reasonable level of yield for clients while still offering the stability that you would expect from the fixed income side of your portfolio? Because it was very challenging to do after 2008 just because rates were so low. So, we spent really, a good part of a year, year and a half developing what ended up being the risk managed income strategy.
And, the idea was to try to find something that could behave like fixed income had on a go forward basis, and that's really what, where RMI was sort of born way back when.
So, it appears that the fund is using some sort of momentum based or price based signal to kind of derive risk on risk off on all the underlying holdings. Can you talk about some of those factors that come into play in order to make those decisions?
Sure. So really, we are, we're really looking at a couple of different things. The big things we're looking at are where are price trends, where's volatility. And then from there, we're looking at what the yield profile of certain areas that come through those filters are. So at the highest level price trends, it's not a momentum strategy per se. What we're not doing is looking for things that are going up the most. It's, at the end of the day, this is a fixed income strategy. What we're trying to do, all things can, all things equal. What we're trying to do is just generate yield, right? what do people expect out of their fixed income portfolio? They expect to earn some income and have it act as a ballast when volatility picks up,
Typically on the other side of the portfolio, on the equity side. So, we're looking at where are price trends? If price trends are positive, we just want to maximize the yield that we can. So it's a fully unconstrained strategy. We can be 100% in any one area. We could be 100% in high yield, bank loans, emerging market debt, preferred stock, 100% in cash, depending on what's going on in the market. So it's fully unconstrained. We're really looking at, are trends positive or negative? If trends are positive, show us the things that have the highest yield. And that's really just how we're building out the portfolio.
So you mentioned, the unconstrained nature of the strategy. Can you talk about, like, mechanically, what happens during periods of change in trend meeting? How does asset allocation change if everything is, in positive trend? What happens if there are things, you're getting mixed signals? Some things are in positive trends. Some things are negative or everything's negative. Can you just talk about, mechanically, what an investor would expect to see at certain rebalance periods as price trends change?
Absolutely. Yeah. So, it is a tactical strategy. But internally, we say that the goal is not to trade. It's not a very high turnover strategy. if trends are positive in some of the higher yielding areas of the market, like domestic high yield, then we'll continue to own that until either the volatility in high yield picks up such that we have to start de-risking the portfolio. Or if the yield profile in the market changes, that something else might overtake it from a yield standpoint. I think a good recent, point to make there is, over the last couple of years, things like bank loans, bank loans have relatively high yields to them.
And when interest rates tick up, the yields that investors receive in those bank loans go up with it. So, bank loans have been an area of focus in the strategy for the last couple of years, whereas historically, they had not played a huge role. So, what we try to do with the strategy is cast a wide net. There's definitely areas of fixed income that will not be owned in the portfolio for an extended period of time, just depending on what the yield of those underlying investments are or what the volatility profile of that particular segment within fixed income is. But so if price trends are stable, we're going to look to maximize yield.
When volatility starts to pick up in the market, if you see credit in fixed income start to act more volatile, the portfolio will start to de-risk depending on how severe the drawdown would be on the credit side using high yield. For example, we could de-risk completely to a safer area. It could be cash. It could be high quality fixed income, things like short duration treasuries, things like that. It really depends. Every market's going to behave slightly differently. There's been markets in the past where we've started to de-risk only for the volatility to fade. And we start putting positions back on.
There's been periods like 2022 is very bad for fixed income where trends were just negative everywhere. So we owned cash for an extended period of time. But typically, I would say over the life of the strategy, the portfolio is usually more invested than not. And it's typically tilted towards some of the higher yielding areas of the market.
Well, so let's stay on the... Because I kind of looked at one of your white papers and you bring up this process, this yield ranking process. So after everything you just said, help me make sure I understand is you're looking at the universe of fixed income. If the price trends of those underlying fixed income investments are stable or good, you're then going to buy the highest yield or favor the highest yielding investments. Is that about the simplest form or is there more of a science to it? Yeah, no.
If trends are positive, we're just going to look. So the underlying portfolio... So within the ETF, it's an ETF of ETFs. So the underlying investments are ETFs. So what we're doing is we're looking at the yields of the underlying ETFs. If price trends are positive, we're ranking that by yield. It's a bit more nuanced than that. But at the highest level, it's as simple as that. If trends are stable, show us the highest yielding areas. And that's where we're going to put the portfolio.
So about how many ETFs are in the portfolio at any given time? And when you get to that number, how are weighting decisions determined?
Yeah. So the underlying investments are equally weighted. So right now, there's five positions in the ETF. So each ETF is 20%. And of those five ETFs, three of them are in one area. And that's bank loans right now. And there's two positions in high yield, some short duration high yield. So when we think about the ETF sizing, we're sort of thinking of them as buckets. So when the portfolio puts risk on and takes risk off, we want it to be done in such a manner that there's not a ton of turnover within the strategy that has to happen when we're doing that.
So typically, or up until, we've always had the allocations to be similar. So right now, it happens to be five funds. when we first started the strategy years ago, it was four funds. So it was four funds at 25%. Now it's five funds at 20%. So the number of funds over time will likely change just depending on some underlying factors, things like the liquidity of the underlying ETFs and things like that. But from a portfolio management standpoint, we've made the decision that keeping them the underlying ETF position sizes equal just allows us to move the portfolio a little bit more efficiently when the markets are moving.
Yeah. So you said something interesting there, like three of your five are in one area. Do you have any guardrails around like over concentration? Like, is there a maximum number of ETFs that can be in a certain space or does it not matter to you guys?
So for this strategy, it doesn't matter. So that, at Grimes, we manage, more fundamentally rooted fixed income strategies. And for things like that, I think for strategies like those, we're much more mindful to some traditional diversification approaches that many people have. For this particular strategy, because it's tactical and can de-risk pretty quickly, for that reason, we allow the strategy to be more heavily concentrated in any one area versus if it was more fundamentally rooted.
And is the strategy like completely active? You can make a trade any day, any time, or do you have it on like a rebalance cadence, whether that's, weekly, monthly, whatever it is?
Nope. So we can trade, we can trade whenever the markets tell us that we need to trade is the best way that we describe it. So as an investment team, we sit down every Monday and do a quote unquote deep dive into the signals, just making sure that the portfolio looks good, everything's still fine. And then we've built dashboards internally that allow us every day to monitor the portfolio in real time. And if, if something were to happen midweek and we were to see a spike in volatility in one of the positions that we own and we had to trade on Wednesday, Thursday, Friday, whatever the case may be, we certainly have the ability to trade whenever.
But it's a weekly deep dive. And then from there, it's daily monitoring of the underlying positions that are in the portfolio.
Got it. And of course, it's an income targeted portfolio. So how often are you guys kicking off distributions? And I know that it's going to be very, it's going to be variable in terms of what that distribution is going to be given the active nature of the strategy. But, do you guys have internally like any sort of like target or is it just the highest level of income given what the market is giving to us today?
Yeah. So the ETF, so RMIF pays out income monthly, and that's going back to some of the underlying responsibilities of us versus Little Harbor. So Little Harbor is tasked with figuring out the income and paying it out of the ETF. The underlying ETFs within RMIF obviously pay dividends. Most of them pay monthly. The cadences to which each of them pay may differ based on which date the fund families pay them out. But yes, Little Harbor, every month, Little Harbor will figure out what the income level was and they'll pay it out to shareholders. As far as a target yield, we don't, we at the portfolio management level don't set a target yield.
Obviously, yields are variable depending on the environment. from an absolute standpoint, yields, yields are going to be higher today or a year ago than they would have been at, any point in time five or 10 years ago. So the yield profile largely depends on the underlying fixed income environment. And the other thing that's complicated with a tactical strategy, if we were to have a yield threshold that we were trying to meet is when the portfolio de-risks, if the portfolio were to de-risk and be 100% in cash, for example, like it has been at points in time. money markets have yield today, which is great.
But, if you think back to much of the last 10 or 15 years, money market rates were zero. So when we would have to de-risk in the past, it was one of those things where we were accepting the tradeoff of zero yield versus losing principal in some of the fixed income areas that were going down in value. So with yields low, if you get a credit event or you get one of these big duration moves that can happen quickly in these markets, the price move can easily overwhelm the yield that you were receiving in that particular investment. So there were plenty of points in time where we were just opting for the safety of cash, even though it had no yield because it wasn't going down in value.
So for those few reasons, we don't set a yield target per se in the strategy. But it has been somewhat consistent over the life of the strategy, even though at any point in time, it may not exactly be, what people would want it to be over a full market cycle.
Sure. Understood. So if I'm a financial advisor, I've got an already diversified model portfolio, like where does RMIF like fit inside that portfolio? Like where would you slot it? What would you maybe, what holding would you maybe replace in order to add this to the portfolio? Like how do you think about portfolio construction using this?
Yeah. So I think there's, I think there's a few unique use cases for it. So going back to the history of RMI and when we built it. So when we built the strategy in 2010, 2011, we, we were trying to look for something that could replicate the yield and volatility profile of core fixed income. So at the time we, we were sort of thinking it as a, maybe not a full blown replacement for, for core fixed income, but something that, that would behave very similar to core fixed income. So, so that was, it was sort of built with that use case in mind. Having said that, I think where, where we've seen some good applications of the strategy is as, as, as a conditional credit type investment.
So with yields back to, reasonable levels these days, there's, there's plenty of use cases for the traditional core fixed income, laddering out high quality bonds at this point. So where RMIF could also be slotted in is as conditional credit. So if you've got a portfolio of traditional core fixed income, you could use this strategy as your conditional credit. So when, when, things are good in the credit markets and volatility is low, it's going to be invested in some of those higher yielding segments for you. And, but you also know that if volatility were to start picking up in the markets, that the portfolio is going to shift.
So, so those I think are some, those are the two big use cases that, that I think we see for the strategy these days. Yeah, no, I would agree.
Well, Joel, I really appreciate you taking some time with me to talk about this today. Before I let you go, can you tell people where to find more information about the fund and, Grimes and Company and also Little Harbor Advisors?
Sure. I think if you, for people looking for more information on RMIF, you can contact the, the folks at Little Harbor Advisors. their, their contact information can be found online there. they've got, they've got a staff of marketing distribution salespeople that they can handle any questions for you. They also schedule periodic webinars with us at Grimes and we do sort of a deep dive walking through the process. Um, so I think they would, they would be the best place for somebody to start that's looking for more information on it.
That's great. Well, again, Joel, thanks so much for your time today. Appreciate you being with me. Great. Thanks, Brad.
We'll see you next time.
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