The Fisher Investments investment process is based on a top-down
approach to determine the countries and sectors most likely to generate
the highest expected returns.
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:
1. Country Exposure—identify which countries are most likely
to outperform the benchmark;
2. Economic Sector Exposure—identify the economic sectors and
industries most likely to outperform the benchmark; and
3. Security Selection—identify the group of securities within
a particular category most likely to outperform the overall category.
Fisher Investments’ Investment Process: Country and Sector Selection
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:
• Economic drivers such as monetary policy, yield curve, and
relative GDP growth analysis.
• Political drivers such as taxation, governmental stability,
and political turnover.
• Sentiment drivers that primarily measure consensus thinking
to identify the relative popularity of investment categories. The
interpretation of such sentiment drivers is typically counter-intuitive
(avoid what is overly popular and seek what is largely unpopular).
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.