Enhanced Index Investment Approach - Domestic

GCM’s enhanced index investment approach leads to broadly diversified, optimized strategies with low-to-moderate levels of expected active risk and return. These strategies are managed to provide portfolios with characteristics similar to their benchmarks with the potential for excess return.
Domestic Approach

Philosophy and Objective

At GCM, we believe pricing inefficiencies exist in the market, and company fundamentals drive stock prices in the long term. By applying an objective, rules-based investment approach we believe we can exploit market biases and inefficiencies in order to generate excess returns. We also believe that through our technological expertise we can implement a diversified portfolio accounting for both alpha and risk characteristics. Our goal is to derive the primary source of alpha via stock selection. We believe that quantitative modeling techniques can help identify pricing inefficiencies and facilitate a systematic and repeatable investment process.

The objective of the GCM enhanced strategies is to employ an actively managed, risk controlled, enhanced indexing process that is highly reflective of the benchmark. The portfolio consists of a diversified list of companies with characteristics similar to the benchmark Index, while maintaining a superior valuation and earnings profile. Our performance objective is to consistently outperform the benchmark Index in a variety of market conditions while minimizing the risk of underperformance.

Before we begin to build the portfolios, we evaluate the investment universe using our Total Composite (“TC”) Model. The TC Model is based on bottom-up, fundamental research, which it conducts within a systematic, objective framework. The model evaluates companies based on valuation, earnings fundamentals and trading momentum to provide a comprehensive view of each company’s relative valuation, operational and financial performance, and stock price behavior. The model then ranks the universe of stocks from most attractive to least attractive.

Portfolio Construction
The portfolio construction process for our enhanced index strategies, like the research it is built upon, takes a bottom-up, fundamental approach. We seek to add value for our clients primarily through stock selection. Positions are diversified among the ten major economic sectors since one of the primary goals of the enhanced index approach is maintaining benchmark-like characteristics. The approach has tight limits on relative active weights to any particular sector.

Enhanced index portfolios are constructed using risk modeling and optimization software. We seek to minimize unintended risk exposures (e.g., relative exposure to sectors/industries, size, growth, or value) and emphasize security selection based on our quantitative research. The optimization process includes overweighting securities that are attractively ranked by the TC Model and eliminating or underweighting securities that are poorly ranked by the model. Enhanced index strategies generally hold a sample of more neutrally ranked securities to help replicate the benchmark’s characteristics within the portfolio.