Large-Cap Core Equity Select 60

• Product sheet and disclosures 
• Performance attribution report 

The Large-Cap Core Equity Select 60 Style utilizes a quantitative approach to realize returns in excess of a benchmark, making use of what we've learned about investor behavior through academic research in behavioral finance.

Investment Philosophy

Ziegler Capital Management applies established investment and economic principles to the management of equities within a risk-controlled framework.

Investment Objective

Ziegler's investment objective is to outperform, over a three-to-five-year period, the total return of the S&P 500 Index on the equity portion of the accounts we manage. Portfolios are managed with consideration to the amount of risk introduced by the disparity of the portfolio's construction versus the benchmark. Ziegler seeks to manage the portfolio so that we quantify the amount of risk incurred to earn a unit of excess return.

Investment Strategy

The Quantitative Research Strategy (QRS), the engine for the investment style, employs a quantitative methodology to realize returns in excess of the benchmark, making use of what we've learned about investor behavior through academic research in behavioral finance.

Behavioral finance suggests the following: investors have a tendency to form their expectations for future equity returns based upon past experience.  Investors tend to "overreact" and extrapolate growth expectations too far into the future. If that expectation is unreasonable, the over extrapolation produces an opportunity to capture excess returns.

In the case of a specific set of "bargain" stocks, investors' expectations are overly pessimistic when compared to the actual performance record. In the case of "glamour" stocks, expectations are overly optimistic when compared to the actual performance record.

Investors base expectations on past experience. Therefore, they are slow to incorporate new information in forming their expectation for future returns. Using a quantitative screening methodology, we seek to capture this investor underreaction.

A broad universe of stocks, exhibiting characteristics similar to the benchmark, is screened and ranked for certain characteristics. We use a portfolio optimization program to produce a portfolio that closely reflects the risk characteristics of the benchmark, while providing for potential excess returns.

Process

The process begins by defining an investable universe.

What makes this process unique is that we can identify the effects of investors' tendency to over extrapolate growth expectations. Stocks are ranked using a two-dimensional categorization screen that captures the overreaction by investors.

Stock categories are defined as:

To capture the effect of investor underreaction to new information, stocks within each category are ranked based on their relative standing with respect to the following momentum variables:

An assignment of expected excess return relative to the benchmark, known as "alpha," is assigned to each of the stocks in the bargain and glamour categories. Generally speaking, bargain stocks carry a 1.00% alpha. However, bargain stocks may receive a 2.00% alpha if they have favorable momentum characteristics. All glamour stocks begin with an alpha of -1.00% and are either demoted to -2.00% if their momentum characteristics are poor, or promoted to as high as 0.00% (making them in effect - neutral) if their momentum characteristics are strongly positive. Bargain and glamour stocks are ranked and an alpha file is created. Portfolio management software is used to generate an optimal portfolio that creates a balance between risk characteristics of the benchmark and the excess return potential of the alpha file. Half, or about 5% of the benchmark's stocks, are bargain stocks because the portfolio optimization process will overweight these stocks relative to benchmark holdings, a result of this narrowed (bargain) universe, is that qualitative analysis can be efficiently employed to determine a stock's potential for contribution to portfolio returns.

The SUE and earnings quality screens are used to eliminate holdings that have the potential to produce problems in the future. Stocks that fail the SUE and earnings quality tests are put into a "limits" file and loaded into the portfolio optimization program. We use these to screen out potential problems at the time of portfolio formation, as well as on an ongoing basis.

The portfolio optimization program takes all the stocks in the original universe and builds a portfolio, using the information provided by the alpha & limits files, which replicates the benchmark within a risk-tolerance range prescribed by the investment policy. The optimizer will tilt the portfolio's weights (relative to the benchmark) toward bargain and away from glamour stocks.