Core and Stable
Oppenheimer Main Street Fund
Nikos Monoyios and Marc Reinganum
Author: Manish Shah
Last Update: , :
|Managers of “core funds” strive to achieve an optimal balance between growth and value consistent with the fund’s defined risk. Finding that right balance and staying ahead of the markets requires both nimbleness...
||Oppenheimer Main Street Fund|
Q: What factors are the most important in your portfolio management process?
Our portfolio management process consists of three important elements. The first step is the allocation by relative market cap, where we decide whether to over-allocate or under-allocate either large-cap or small-cap stocks.
The second step is the specific stock selection process, where we use different models with optimized variables for each universe to select from the mega-to-micro cap stocks. But no matter how much we like or dislike a particular stock, we have to stay within the allocation limitations.
The third step is trading and execution. Some large portfolios are so concentrated that trading can have a significant market impact even in the large-cap world. This is called market impact and it can add significantly to the cost of buying and selling a stock. In our portfolio, the turnover rate averages from 70% to 80% and the portfolio is not concentrated on a few names. As a result, our cost can be much lower than a typical fund because our positions are smaller and the pace of adjustment is more gradual.
Q: How do you identify and respond to the market signals?
At the end of 2002, the quality of credit spreads between high yield and low yield debt was very high. That was a signal that the small-cap stocks were likely to outperform, and that turned out to be correct. Between October 2002 and the first half of 2003, small caps outperformed all other categories. Right now we are looking at how the higher risk assets are priced and how they are likely to perform in coming months. And we are also looking closely at valuations.
In contrast to early 1999, when large caps were extremely expensive relative to small-cap stocks, the large caps are currently very attractively priced. Historically, we have identified statistical patterns in the relative movements of large- and small-cap stock valuations, interest rate spreads, short-term momentum, and long-term reversals. We are currently trying to identify which market cap category is likely to outperform or underperform.
Q: What is your risk control process?
As we indicated, our allocation process limits how much we can overweight our best ideas or underweight stocks that we like least. We do not use an explicit sector-based allocation; however, an implicit allocation results from the portfolio construction process. In general, our sector allocation does not differ from the S&P 500 by more than 500 basis points.
We do have a separate risk management group independent of the portfolio managers. Every month they provide us with an analysis of risk measures and performance drivers base on an independent risk model of the portfolio. That gives the portfolio manager another perspective so he can assure himself that he is not taking unintended risks.
The group also monitors the portfolio to make sure that our investment strategies are consistent with stated objectives of the fund and not taking extreme positions. Over the long term, risk management is very important if the fund is going to fulfill its objective.
If you underperform the benchmark by a substantial amount in a given year, it may take years to make it up, but the fund's investors may never be able to achieve their retirement goals.
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