Q:  Your whole philosophy is that markets go up and down, sectors go in and out of favor, styles go in and out of favor and there are disparities at certain cycles and you basically want to adjust at that level rather than worry about taking an individual security risk.

A: Yes, we have eliminated stock selection and sector selection because within the six size and style boxes we are mimicking the stock weights and the sector weights. We are basically going for the larger industry segment. There is no clear industry term for large-cap growth so I call it an industry segment. So we’d say we like large-cap growth and we like large-cap value. We are not saying we like healthcare within there, or subsequently, we like J & J within there, for example. We are comfortable enough to tr y and pick out when those segments come in and out of favor and not tr y to figure out which sectors and stocks will outperform.

Q:  But you have at least between 8 and 10 years for back-testing that you can do if you want?

A: Yes, the Russell Indices themselves go back to the early ‘90s so even if there were not iShares you can see how Russell Mid Cap did back into the early ‘90s. So we can back-test for 15 years. The iShares track the indexes so we are comfortable with the index construction because those go back to 1992 - 1993.

Q:  Why did you decide to benchmark against the Russell index and not any other index?

A: We didn’t pick the S&P indexes because for the most part the S&P indexes would not have level of smallcap exposure we like. A lot of the investment community does benchmark against the Russell index so you have a marketing message. From my perspective, the general investing public still doesn’t really address the Russell. Ten years ago it was only the Dow Jones Industrial Average and now it is S&P 500, so at least there is some progress.

Q:  Does the fund have a lot of volatility on an annual basis.

A: The fund is young so I can’t rely too much on the fund statistics. There is certainly some volatility. We are tracking error risk principally. We are not making market calls. We don’t build up cash levels and we don’t decide to take some off if we think this quarter’s going to look bad for equity. We are nearly 100% invested in the market keeping cash for redemptions.

Q:  If small caps start outperforming the large caps, do you start increasing allocation to small caps that you are permitted in the fund or you wait for another month or longer?

A: The second business day of every month we rebalance the model or I may choose to let the model run its course. If I don’t like what the model is doing I challenge it. The challenge is on getting good data points and the reason why quantitative models work well is that we are not trying to find the best stock. We are just saying on average where money is going in and out of and where investors are gravitating towards. But the challenge is always finding good investment factors that are reliable.

Q:  Is it true that you always lag 30 days from what has already happened?

A: Well, no, because these regression statistics were forward looking so when we identified them we were looking for factors that predicted 30 days or the next month’s performance. It’s definitely a forward-looking model.

For example, the indicator on operating margins will show that in general margins are declining in large caps, looking ahead, so we have a signal to lower our allocation in the segment. While you are catching individual statistics you have to think rate of change tends to work better than absolute comparison.

We are looking at historical data points and we are trying to forecast the investment behavior in the coming weeks and months. It does have forward-looking statistics because you have earnings estimates and dispersion of earnings estimates so you have the consensus estimates coming from the companies. A lot of this data is very similar to what fundamental analysts look at.