process

Process

Our investment process is designed to consistently outperform the market. Our focus on consistency is key to our methodology. We draw on the strengths of quantitative and fundamental research to offer these investment strategies to our clients.

Define the Investment Universe

We review the universe of stocks comprising over 1,200 largest publicly traded companies, including all constituents of the S&P 500 and Russell 1000 Indices. From there we review the appropriate quantitative data.

Systematic Stock Selection: Quantitative Multifactor Model

This is a time tested approach that seeks to identify stocks with the greatest expected outperformance in an objective and efficient manner.

Our Systematic Stock Selection includes a Quantitative Multifactor Model based on the Affinity Score. This is a quantitative multifactor measure based upon a combination of independent investment anomalies that have identified stocks with positive excess returns. The Affinity Score is a weighted combination of key factors:

  • Valuation: Expected return using a proprietary Dividend Discount Model
  • Expectations: Revisions of sell-side analysts’ earnings estimates
  • Momentum: Recent relative price strength

We rank stocks within each sector based on the Affinity Score:

Top quartile ranked stocks are considered “Buy Candidates”

Bottom quartile ranked stocks are “Sell Candidates”

The Affinity Score model tends to favor attractively valued stocks with improving expectations and favorable momentum in each sector. It has generally provided a stronger and more consistent signal of positive excess returns than its underlying individual factors. The model seeks to identify the most attractive stocks in each sector.

Model Example: Transportation Sector

Systematic Stock Selection: Fundamental Overlay

This “Best of Breed” approach looks for potential problems, not opportunities, among the “Buy Candidates” of the Affinity Score multifactor model. To make this happen, we look at the following:

  • Test of reasonability on data
  • Control for risk factors relative to the benchmark, such as
    • Sector diversification
    • Market capitalization
    • Industry representation
    • Style
    • Fundamental characteristics
  • Utilize judgment and experience of the portfolio management team

This supplements the quantitative multifactor model, utilizing external and internal research.

Sell Discipline

Affinity Score rankings of portfolio holdings are continuously monitored to assure that the portfolio’s excess return potential is maintained.

Stocks are sold if their rank falls into the bottom quartile of their sector:

  • Expensive relative valuation
  • Deteriorating relative revisions of earnings estimates
  • Unfavorable relative price strength

Stocks are trimmed if their portfolio weights become too large and risky

Stocks are sold if there is a dramatic change in business fundamentals

Disciplined Portfolio Construction and Comprehensive Risk Management

A portfolio will be comprised of 40 to 60 stocks with a risk profile similar to the specified benchmark. Risk management attempts to ensure that the portfolio remains truly diversified. We integrate the results of systematic stock selection and comprehensive risk management to:

  • Attractive valuation
  • Improving expectations
  • Favorable momentum

Build a portfolio that seeks to maximize return / manage risk relative to the benchmark
Emphasize exposure to expected sources of outperformance

The Portfolio is monitored continuously and adjusted as necessary. Clients can expect low turnover, historically about 40% per year. We monitor and manage the portfolio vs. the benchmark to avoid unintentional exposures to multiple risk factors that can include: economic sector, market capitalization, industry, style, fundamental characteristics.