In constructing portfolios we seek an optimal risk-return profile. Style is controlled by including both growth and value stocks in the portfolio thereby neutralizing this source of volatility of returns. Market risk is managed within a macroeconomic framework used to construct the portfolio. Equity duration measures are used to set market risk exposures for the portfolio as a whole and for individual sectors of the portfolio. Stock specific risk is controlled through diversification across economic sectors. When the stock market’s fundamentals are deteriorating, we seek to position our portfolios defensively or shorten the equity duration of the portfolio versus the benchmark. When the stock market’s fundamentals are improving, our portfolios assume more economic risk.
Industry weights are determined through our industry analysis and review process. We examine key drivers of each industry and analyze prevailing trends. Their strength and weakness of key players in industries are also evaluated. All of these determine the rationale behind overweighting or underweighting particular industries. Security weightings are based on a combination of quantitative and fundamental analysis. Stocks with attractive alphas in our quantitative model are subjected to rigorous fundamental analysis. Factors that are taken into account when deciding security weights include company guidance, earnings and revenue estimates, valuation, cyclical conditions, competitive environment, brand franchise, and technological advantage.