Q:  What is your investment philosophy?

A: We believe that stock prices are driven by investor behavior. There are persistent mispricings in the marketplace that can be exploited through quantitative techniques. We believe that academic and internal research supports our view.

Q:  What are the key elements of your investment process?

A: Stock and market research is a critical component of our investment process and it is purely quantitative in nature as you might tell by the name of the fund. We are looking for companies with attractive relative valuations and the ability to support future growth with high quality earnings and a solid outlook for growth. We believe that if we identify those types of companies and overweight them relative to our benchmark, we are going to add value relative to that benchmark over time. This approach involves bottom-up stock selection based on multiple perspectives or core quantitative models.

We break our core quantitative model into three components - a valuation component, a quality component and a sentiment component. We look for companies with attractive valuations and that is the valuation component. The quality component addresses the quality of earnings. The sentiment component addresses the ability of that company to support solid growth in the future.

Q:  How do you arrive at the opinion for each stock using these models?

A: Since our process is quantitative in nature, we rely on our financial models. Every day the models are run and we get our financial data from publicly available sources including financial statements, earnings estimates, stock prices and other technical and fundamental data. Each stock in our universe is given a ranking for each of these models, and we have a weight that we apply to each of the models that sums up to a single opinion for each stock. We sort that universe from top to bottom and we select our stocks from that list.

Q:  How many stocks have you got in your universe?

A: Our investable universe encompasses all large cap US stocks. It equates to roughly 1,100 stocks, and that number changes over time, but it includes the S&P500, the Russell 1000 and a few other stocks with large market caps.

Q:  What is the rationale behind these financial models?

A: The rationale behind quantitative models is that we are able to take an enormous amount of data that the traditional fundamental investor won’t be able to digest and form opinions on without the assistance of the models we have.

The other advantage of quantitative models is that they are not driven by what is going on in the market at a given moment or the emotion or the portfolio manager or the analyst.

The third advantage is that these models are very disciplined. We never waver from our process. We learn from what is going on in the market, and we may apply newly acquired knowledge to a model, but typically, it does not pay for any portfolio manager to react to what’s going on in the market that day or that month.

The market is driven by people and people have behaviors they exhibit over and over again and they repeat the same mistakes over and over again. Using quantitative models, we are able to identify and exploit these opportunities.

Q:  Can you give an example of such behavior?

A: For example, investors typically have two types of well identified behaviors related to growth. First, they overreact or underreact with new information in the marketplace. Second, they tend to ignore information that disagrees with their prior beliefs. Those are the two trends of Wall Street analysts’ earnings estimates in a number of different ways. We’ll also look at the longer-term trend of provision analysts’ estimates to exploit both of those behavioral anomalies.

Q:  How do you go about portfolio construction?

A: Our portfolio construction is also formed as risk control. We have created a portfolio construction process that is specifically designed to work with our stock selection process so that we can maximize the potential of that stock selection process and at the same time, measure the primary sources of volatility that we don’t want in the portfolio.

Once we have our ranking of stocks, using our valuation, quality and sentiment models, our job is to maximize the expected return of the portfolio, but we’ll do that within the risk parameters that we have defined. We are concerned about managing our risk parameters around the S&P500 benchmark. First parameter is the market risk, which is similar to traditional measure of volatility. Then, style risk or size risk as defined by market capitalization. We are also concerned with industry and sector exposure.

We have found through our research and in managing portfolios in the last couple of decades that if we stay within the defined boundaries, we will keep our excess returns and our excess risk in line with our clients’ expectations.