Q: Can you describe the basic objective of your fund and how that relates to the target investor?

A: This fund is designed to be the foundation, or the central core, of an investor's long-term investment portfolio. It is appropriate for investors who have a long-term horizon and are looking for both safety and performance. The fund is highly diversified and seeks to provide an enhanced return over the benchmark S&P 500 index. By using the fund's investment flexibility between value and growth, we manage to control risk and provide a greater average return than portfolios limited to a single investment style.

Q: What is the fund's investment philosophy?

A: We manage this fund using a quantitatively structured, disciplined approach. Without a highly disciplined approach, like that provided by quantitative models, portfolio managers often over-react to daily events. Unless they have a rigid procedure that force them to weigh all of the relevant factors before making a decision, managers can make mistakes.

From our experience, we believe that a quantitative approach to investment management reduces the frequency of trading errors. We try to avoid quick buy and sell decisions based on a single headline. By using a structured quantitative approach, the full array of variables driving a stock's price comes into focus, and that tends to reduce the likelihood of rash decisions or extreme positions.

Q: Would you describe how you use these models in the investment process?

A: Every week we review about 3,000 stocks as potential buys or sells, and end up trading from 100 to 300 individual names. Monitoring such a large number of stocks would not be possible without computerized models to perform the work. The model filters current information from a variety of sources, combines it with company financial information, and highlights stocks of interest. While the logic is fairly simple, the actual process is highly complex and well beyond the ability of a single human mind.

The approach helps us avoid putting too much emphasis on short-term events or become too confident about a particular position. Because we run a very diversified portfolio with roughly 400 stocks, the impact of a single stock on the portfolio is fairly limited - either on the upside or downside.
A quantitative approach also helps us focus on the big picture. Often analysts become so wrapped up in the minute details of a company's business that they fail to recognize the larger trends. By using models that simultaneously take into account internal financials, such as valuation, profitability, momentum, quality, and risk, as well as a large variety of external factors, we can develop a dispassionate prospective of the value of a stock.

Managers of growth style funds tend to focus primarily on price and earnings momentum, while managers of value style funds focus on valuations. We focus a great deal of attention on both, as well as sources of potential risk. Our models are flexible enough to adjust for changing market cyclicality and to encompass new factors that may become important.
Many managers believe that visiting companies and having face-to-face meetings is the only research that counts. We do not visit companies. Instead, we do systematic research into the factors and phenomena that drive stock prices in the market.

Any information coming from management is quickly reflected in the price, but it is the deeper quantitative research that provides effective longer-term stock selection indicators, not talking to company management.

Q: How do you shift allocation among small-, mid-, and the large-cap segments?

A: When we analyze market trends with regard to capitalization, we are looking for systematic influences and not idiosyncratic influences. Market capitalization is a very important determination of portfolio performance. We divide the world into mega-, large-, mid-, small-, and micro-cap stocks. Our models are geared to take the relative performance of stocks by capitalization into account, and that factor is an important variable in the selection criterion.

We have been using relative capitalization in our models for over ten years. It appears that the market cycles by relative capitalization are not fully exploited. The relative performance goes through a cycle that may last as long as five years or more. Fund managers that focus on performance of three to five years may miss out on the benefit of these longer-term cycles. The same is true for investors looking at retirement or college savings. Having the right exposure to market capitalization can add considerably to the value of a portfolio.

From 2001 through 2003, the Oppenheimer Main Street Fund had a market cap that was only 0.80 times the market cap of the S&P 500; that is the Fund was 'smaller' than the S&P 500. That was a conscious decision based on the market environment and what our models were predicting for the next twelve months. At the beginning of 2004, the models shifted their bias from small-cap stocks to large-cap stocks. As a result, we changed our market cap to 1.25 times the market cap of the S&P 500 by the end of August, now favoring mega cap stocks.

Q: How has that helped your fund performance?

A: That decision added one-percentage point to the fund's return. That moved us to the top 9% of funds in our peer group for the three-year period, which is the Lipper Large-Cap-Core Category. For the one-year period, we were in the top 11%.

Q: Why do you believe that stock weighting is as important as stock selection?

A: From our experience, we have found that stock weighting in a portfolio is just as important as stock selection. In general, a great deal of effort is spent in stock selection but very little in stock weighting. If you look at the market in terms of market cap, almost 40% of the entire value of the market is made up of 52 mega-cap stocks. If you look at the large-cap universe by adding in the next 219 largest companies, then you add an additional 30% of the market's total value. In other words, the 271 largest companies make up 70% of the value of the market.

Since all actively managed large-cap funds essentially draw from the same basket of stocks, the difference in fund performance is often the result of the differences in weights of the individual stocks in the portfolio, not the differences in the names of the stocks in the portfolio. So the weight allocation in effect drives the performance of the funds in this universe.