Once we have identified the key factors associated with stock outperformance, we use them as a framework to create our stock investment strategies. These strategies are then implemented based on the following process.
Identify Stock Universe
Our strategy implementation process begins with identifying the applicable stock universe from which we select the stocks with the most favorable prospects. Each stock universe that we build takes into account certain key requirements such as a stock’s size, liquidity and location of exchange.
Apply Initial Factor Screen
Within the applicable stock universe, we apply our factor-based models to remove from consideration any stock whose factor profile suggests poor future returns. For example, at this stage, depending on the specific strategy, we look to exclude any company that may be overvalued or has exhibited poor financial and/or operating performance or excessive historical price volatility. Our goal here is to avoid bad companies whose stock may be in jeopardy.
After we have identified those stocks with the most favorable factor profiles, we then rank them based on one or more individual factors such as the stock's valuation, quality, price momentum and/or historical price volatility. Depending on the specific strategy, those stocks with the best valuation, quality, price momentum and/or low volatility factor characteristics are then selected for inclusion in the portfolio, subject to a maximum sector exposure rule. Our goal here is to identify and select those stocks that have the highest probability of future outperformance.
Depending on the specific strategy, the selected portfolio stocks are then either equally weighted, market cap weighted, fundamentally weighted or weighted based on their inverse-volatility. The portfolio is also remodeled and rebalanced at least annually.