Enhanced Index Investment Approach
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 click here for International Approach
Philosophy and Objective
Philosophy and Objective
The approach is founded on the philosophy that we can capture excess return that arises out of certain pricing inefficiencies by investing in a diversified portfolio of companies that are undervalued with superior earnings fundamentals. The overall objective of the enhanced index approach is to construct portfolios with superior valuation and earnings profiles as compared to their benchmark, while maintaining characteristics similar to the benchmark for risk control purposes. In doing so, we aim to consistently outperform the benchmark in up and down markets while minimizing the risk of underperformance.
Research
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.
International Approach
Portfolio Signature
During the portfolio construction process, the results of the quantitative evaluation are combined to provide a portion of the Portfolio Signature, which is the overall active exposure of the portfolio to a number of specific fundamental attributes.
At its core, Portfolio Signature refers to the aggregate exposures within a portfolio to each alpha and risk factor. Within the context of international investing, alpha factors have been selected to exploit four types of inefficiencies in the market:
Research
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.
International Approach
Portfolio Signature
During the portfolio construction process, the results of the quantitative evaluation are combined to provide a portion of the Portfolio Signature, which is the overall active exposure of the portfolio to a number of specific fundamental attributes.
At its core, Portfolio Signature refers to the aggregate exposures within a portfolio to each alpha and risk factor. Within the context of international investing, alpha factors have been selected to exploit four types of inefficiencies in the market:
- inefficiencies caused by emotional investor behavior
- inefficiencies caused by imperfect information dissemination
- inefficiencies caused by signaling/agency issues relating to corporate insiders
- inefficiencies caused by geographic constraints on the flow of capital, labor and information
While a quantitative alpha model produces opinions on individual stocks, the Portfolio Signature provides an integrated view of the total portfolio. The Portfolio Signature concept focuses the team’s attention on the aggregate exposures to each alpha and risk factor. The idea behind Portfolio Signature is to achieve a balanced portfolio that can generate alpha through diversified potential sources while tightly managing risks. The approach identifies optimum ranges for each alpha and risk factor to protect against unintended risks, while positioning it for consistent performance during a variety of market conditions. During the portfolio management process, any outliers from the determined optimum ranges are identified, and optimization rules are implemented to seek out the best securities to trade in order to achieve the optimum portfolio signature -- that is, the optimum aggregate exposures to the alpha and risk factors.