“LARGE CAP CORE”
The “Large Cap Core” product is an actively managed, concentrated, U.S. equity strategy that seeks to identify the 30 best publicly traded companies and the 20 most attractively priced (value) companies from the 100 largest capitalized companies based on a proprietary methodology. The common stocks issued by these companies are combined in an investment portfolio and equally weighted at two percent each. Each client portfolio in this product category is rebalanced to equal weighting 30 days after the end of each calendar quarter.
The Large Cap Core utilizes a bottom-up, multifactor, decision-making model known as Mathematical Value Theory (MVT) which is a systematic process where basic value is defined and analyzed mathematically rather than subjectively. It affords a disciplined, formula-based, repeatable method for selecting from a universe of stocks to construct an investment portfolio. MVT enables one to identify subsets from a broader universe of companies where the average of the subset is superior to that of the universe.
The process begins by taking 27 fundamental financial ratios from reported company financial statements and comparing them within relevant time frames to (1) an ideal company, (2) other companies of the same type and (3) all other companies in the chosen index. The companies are given a relative score from each of these comparisons based on proprietary weightings for each type of company and then ranked. Changes in company scores over time are compared and incorporated. Stock price variables are then factored into the algorithms. From this is derived a list ranking the companies in the index from best to worst.
As this is a bottom-up, multifactor-driven model, there is no consideration of macro-economic forecasts, traditional Wall Street research or company guidance. Qualitative judgments are introduced as the final portfolio candidates are individually reviewed for any data discrepancies or any ‘hard’ news that might change the facts of our analysis. From this comes the final ranking, whereby the 30 best growth names are chosen as well as the 20 best value names and given equal weighting (2% each), held for one quarter and then rebalanced. This process is repeated 30 days after the end of each calendar quarter in order to capture additional quarterly data.
Although the approach to stock selection and portfolio management is ‘data-driven’ as described in some detail above, it is not exclusively data dependent. Following the multi-factor model analysis, the final inspection or qualitative analysis examines any new information that is “in the market” but not in the data. This is a key aspect of the approach. Once the methodology has the portfolio prospects down to 60-90 stocks, a detailed review of news and company announcements over the previous month is done to determine if there is information “in the market” that is not in the data. Additionally, a close current information analysis is done of issues that are moving up in ranking vs. those that are moving down, especially at the ‘edge’ i.e. those issues ranked between 25 and 35. These ten stocks receive even more detailed analysis with a view to the direction of the move in the rankings along with any news in the market not in the data alone.
The methodology helps determine what are believed to be the 30 best growth companies and the 20 best value companies from the very largest companies in the market as characterized by the Russell 200, and they are included with equal weightings. At the end of the quarter, some of the companies will be replaced in the portfolio with better companies and the weightings of the names whose values have appreciated will be reduced to 2% along with the other companies in the portfolio.