In this effort, Fisher Investments seeks to both discover unique sources of information and exploit inefficiencies uncovered through unique analysis of widely available information. The Fisher Investments process used focuses on three basic decisions. They are:
Fisher Investments uses a multitude of indicators or "drivers" to determine country and sector allocations. These drivers are a part of the top-down portion of the investment process and provide the basis for establishing relative risk and return expectations for categories defined by country and sector. These drivers include:
Often times, these decisions are predicated on exclusionary management. This involves determining what categories to avoid or underweight based on relative expected risk, and therefore over-weighting the remaining categories that should have the highest relative expected return. The Fisher Investments Investment Policy Committee (IPC), with the assistance of the firm's research staff, continuously monitors these drivers to ascertain if any of them are indicating an extreme reading, and if so, whether the market has discounted the factors yet. Only material readings not believed to be fully discounted into pricing are acted upon. The IPC uses this information to determine country and sector weights relative to the benchmark.
Fisher Investments' Investment Process: Securities Selection Once portfolio weights are determined, a series of multivariate risk factor screens based on desired style characteristics are applied to each category requiring a weight. Securities passing these screens are then subjected to further quantitative analysis to eliminate companies with excessive risk profiles relative to their peer group, companies with excessive leverage or balance sheet risk, and securities lacking sufficient liquidity for investment. We apply fundamental research to ascertain which stocks within a given category would accomplish two goals:
First, Fisher Investments seeks companies possessing strategic attributes consistent with higher level themes in the portfolio derived from the drivers mentioned earlier. For example, if we believe owning companies with dominant market share in consolidating industries is a favorable characteristic; we search for companies with that profile within the particular category we are examining.
Second, Fisher Investments seeks to maximize the likelihood of beating the category of stocks from which we are selecting. For example, if we determine we want a particular weight in the portfolio of large cap European banks, and need four stocks out of 17 that meet the quantitative criteria, we then pick the four that as a group maximizes the likelihood of beating all 17 as a whole. This is different than trying to pick "the best" four. By avoiding stocks likely to be extreme outliers versus the group, we believe we can reduce portfolio risk while adding value at the security selection level.
Based on this analysis, the IPC selects securities for purchase. Additionally, the IPC applies risk management controls based, among other things, on an analysis of prospective stocks to assess their correlation to the country and sector in order to maximize the possibility of leveraging top level themes and to identify unintended risk concentrations in the security selection process. Performance is regularly decomposed into country, sector, and stock factors to confirm that alpha is derived from intended sources.
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