1

Integrating Two Diverse Styles of Investing: Quantitative and Fundamental

Pankaj Agrrawal, Ph.D.Gartmore Global Investments

Director of Quantitative Investing

Northfield’s 15th Annual Conference

May 7, 2002Yosemite, CA

2

Outline

• Introduction

• Role of Quantitative Analysis

• Building a quantitative platform – Alpha Generation– Optimization– Portfolio Construction– Performance Measurement & Monitoring Risk– Toolkit

• Summary

3

I. Introduction

Presentation draws in part from my experience in investment management as practiced in the U.S.– Research and Engineering Models

• Vestek Systems, San Francisco: Quantitative Analyst– Research & Engineering Models and Communicating to Analysts

& Portfolio Managers• Putnam Investments, Boston: Quantitative Analyst, VP

– Designing Models, Processes, & Trading• Gartmore Global Investments, Philadelphia-London: Director of

Quantitative Investing– Teaching and Research

• Adjunct Finance Faculty at Golden Gate U. & Harvard University.

4

II. Role of Quantitative Analysis

Quantitative Investing Fundamental Investing

InvestmentProcess

Technical InvestingIntegration is a Force

Multiplier

• Harness and incorporate the power of quantitative theory into an active investment process.

• Portfolio construction and embedded alpha through the union of fundamental and quantitative processes.

• A quantitatively driven process as a marketing edge, not a hurdle.

5

Understanding Quantitative & Fundamental Investing

Quantitative Investing

• Design model

• Engineer model

• Examine results

• Monitoring and attribution

• Risk management

• Alpha generation

• Optimization - risk and αααα

• Markowitz diversification

• Strategy diversification

Fundamental Investing

• Visit management

• Breakdown balance sheets

• News flow

• Industry forecasting

• Inspecting product pipeline

• Mergers and acquisitions

• Best idea focus list

• Simple diversification

• Thematic investing

6

Glass Box Helps Bridge the Disciplines

BLACK BOX

• What’s going on?

• What’s driving decisions?

• Is it flexible?

GLASS BOX

• Total Transparency

• Adaptive - Anticipatory

• Understandable - Reality Check

InvestmentInvestmentProcessProcess

P/E

Performance Attribution

SalesGrowth

Portfolio Optimization

Fundamental Analysis

TrackingError

Alpha Model

Risk -Return

7

A Starting Point: Understanding High Impact Factors

% of Monthly Returns Explained by Systematic Factors

0

10

20

30

40

50

60

70

80

Single Stocks 10 Stock Portfolios 20 Stock Portfolios 50 Stock Portfolios

% o

f Mon

thly

Ret

urn

Varia

tion

Expl

aine

d

Mkt. Movements

Style Effects

SectorMemebershipFirm-SpecificInfluences

• Research and Model the High Impact Factors in the Alpha Generation and Portfolio Construction Process

- Leverage market efficiency to boost returns- Model factors driving market and style returns

•Wiliam Sharpe’s Research

•CSFB Quant Research

8

Objective of Integration: High Risk-adjusted Performance

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%1/

07/0

01/

28/0

02/

18/0

03/

10/0

0

3/31

/00

4/20

/00

5/12

/00

6/02

/00

6/23

/00

7/14

/00

8/04

/00

8/25

/00

9/15

/00

10/0

6/00

10/2

7/00

11/1

7/00

12/0

8/00

12/2

9/00

1/19

/01

2/09

/01

3/02

/01

3/23

/01

4/12

/01

5/04

/01

5/25

/01

6/15

/01

7/06

/01

7/27

/01

8/17

/01

9/07

/01

9/28

/01

10/1

9/01

11/0

9/01

11/3

0/01

12/2

1/01

1/11

/02

2/01

/02

2/22

/02

3/15

/02

Exce

ss R

etur

n

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Trac

king

Err

or

Excess Return Tracking Error

Risk MgmntSoftware Introduced

Core/SatelliteApproach Used in Technology

Core/SatelliteApproach in All Sectors Core/Satellite

Rebalanced

Full Scale PerformanceAttribution

Risk ReportSystemImplemented

Quant AlphaModel

Quant Alpha ModelRecalibrated

PerformanceSnapsheet

9

III. Building a Quantitative Process - a Template

StarmineFactor Model Conditional Betas

Security Universe

Optimization

Portfolio

Binary Fundamental Screen

Fundamental

Factors VPEG

Core Constraint

PerformanceAttribution &

Risk Monitoring

10

Alpha Modeling: Increasing the Investible Universe

Equity Market

Investible Universe using Quantitative Tools

Fundamental Coverage

Portfolio

11

Use Models/Screening to Identify Factors Driving the Market

• Factor 1: 5-year compounded earnings growth

• Factor 2: Market Excess P/E- (Company Price/EPS) - (S&P 500 Price/EPS)

• Factor 3: The least squares long-term growth rate of quarterly sales- The least squares growth method in this case takes 20 sequential quarters of LTM sales. - The natural log of these 20 data points is taken.- Then, a regression is performed to fit a line through the logs. - The slope of this line is converted back to a base ten number by exponentiating it and

then converting it into a percentage.

• Factor 4: Earnings Dispersion

Example of a Factor Model

12

Model Results: Reviewing High Impact Factors

• Understanding Regime Shifts

• Identify New Opportunities

Weighted Annualized Returns by Fractile

14.6216.77 16.98

24.74

31.88

21.8

0.005.00

10.0015.0020.0025.0030.0035.00

-1- -2- -3- -4- -5- S&P 500

Fractile

Ann

ualiz

ed R

etur

n

13

• Implementing investment objectives and constraints

• Controlling the components of portfolio risk

• Implementing the manager’s investment style, philosophy, and market outlook

• Efficiently using active return information– Analyst forecasts– Quantitative models

• Two Types of Optimization– Alpha optimization– Tracking error optimization

Optimization in the Investment Process

14

Optimization & Time Frame

• Present Situation– Portfolio sensitivity to changes in a factor– What does the portfolio look like today?

• Forward Looking– Designing strategy, products, and policy (i.e. tracking error bands)– Produce portfolios or parts of portfolios

• Backward Looking– Measure the performance of an actively managed portfolio versus

an optimized portfolio.– “Go Play Golf” metric

15

“Heat” Matrix

Top and Bottom Correlation to: JNJ Sector: Healthcare

Top Five Correlated Companies: Sector Correlation:SGP 0.64 Sector 0.79 BMY 0.64 MRK 0.64 Heat Matrix:ABT 0.68 Healthcare Tolerance: 0.88CRH 0.91 Correlation Matrix

Based on Monthly DataBottom Five Correlated Companies: (1990-April 2000)SBH (1.00) PEB (0.97) AGN AHP AMGN AZA BAX BCR BDXMEDI (0.61) SBE 0.88 (0.74) 0.87 0.95 0.55 0.67 (1.00) DNA (0.56) SBH (1.00) 1.00 (1.00) (1.00) 1.00 1.00 (1.00) SBE (0.55) SGP 0.30 0.58 0.24 0.50 0.51 0.36 0.30

• Gives Most and Least Diversifying Assets • Correlation of JNJ with Sector = 0.79• Hot/Cold Spots in Partitioned Sector Correlation Matrix at Absolute

Tolerance of 0.88

16

• Performance attribution– Transparency: Confirming the implementation of investment

objectives and constraints– Measure the effectiveness of alpha models– Identify trends

• Risk Management– Portfolio risk decomposition

• Stock specific• Factor• Industry

– Controlling the components of portfolio risk• Marginal contribution of risk

Performance & Risk Measurement

17

Build Transparency: Weekly Performance SnapSheet

Current Last Week Current Last WeekFund A 3.49 3.03 1.00 0.89Fund B 4.51 4.61 0.97 1.03Fund C 6.72 5.52 1.02 1.10% Cash Exposure

Current Last WeekFund A 1.12 4.98Fund B 3.80 3.73Fund C 15.26 3.10Benchmark Relative Sector Exposure

Largest Overweight Largest UnderweightSector Weight Diff. Sector Weight Diff.

Fund A Consumer Cyclicals 3.10 Technology -6.89Fund B Communication Services 4.90 Health Care -3.64Fund C Technology 4.10 Health Care -8.86

Benchmark Relative Company Exposure

Largest Overweight Largest UnderweightCompany Weight Diff. Company Weight Diff.

Fund A Fannie Mae 3.30 General Electric Co. -4.03Microsoft 1.59 AOL Time Warner Inc. -1.68

Fund B General Electric 3.44 Citigroup -3.46Target Corp. 3.02 Wal-Mart Stores Inc. -3.14

Fund C Transocean Sedco Forex In 1.99 Harley-Davidson Inc. -1.69Noble Affiliates Inc. 1.87 Allergan Inc. -1.47

YTD Active Management PerformancePeer

Actual Static Optimized Index Rank MTD YTDFund A -8.60 -14.33 -15.80 -14.24 3 of 24 0.22 5.64Fund B -33.89 -31.35 -28.45 -24.13 23 of 25 -0.05 -9.76Fund C -27.65 -31.50 -28.42 -29.28 8 of 23 1.82 1.63

Excess Performance

Weekly SnapSheetTracking Error Beta

18

Measuring Active Management Decisions

1-yr Info. * Net * MTD Net * YTD NetRatio 1-Week 1-Month 3-Month YTD 1-Year Assets Flows Flows

Fund A 1.16 1.33 1.88 5.02 5.63 6.97 1,945,427,250 11,771 137,357,537 Fund B 0.24 0.99 3.04 2.09 2.82 1.47 391,622,520 3,487,210 (15,665,667) Fund C -0.90 0.99 1.18 1.13 1.66 -10.52 987,256,000 (93,588) 1,940,065

Fund AEconomic Avg % Total Percent Avg % Total Percent Brunswick Corp. 0.19 International Business Machines C -0.20Sector Assets Return Contrib Assets Return Contrib Norfolk Southern Corp 0.10 Intel Corp. -0.12Consumer Discretionary 13.46 4.53 0.60 13.60 1.38 0.19 Pfizer Inc. 0.10 Fannie Mae -0.07Consumer Staples 6.74 1.78 0.12 9.23 2.17 0.20 Maytag Corp. 0.10 Cisco Systems Inc. -0.06Energy 3.84 -3.41 -0.13 6.85 -3.18 -0.22 Masco Corp. 0.10 Verizon Communications -0.06Financials 18.14 -0.28 -0.05 19.03 -0.18 -0.03 Target Corp. 0.09 SBC Communications Inc. -0.06Health Care 11.76 0.65 0.08 14.08 0.66 0.09 Eaton Corp. 0.05 Exxon Mobil Corp. -0.06Industrials 16.25 2.81 0.45 11.18 -2.35 -0.26 Centex Corp. 0.05 Citigroup Inc. -0.05Information Technology 16.17 -3.42 -0.57 15.46 -3.84 -0.60 Fortune Brands Inc. 0.05 AT&T Corp. -0.04Materials 5.75 0.58 0.03 2.89 1.05 0.03 Leggett & Platt Inc. 0.05 Sun Microsystems Inc. -0.04Telecommunication Servic 2.41 -6.86 -0.17 4.42 -7.98 -0.36 PepsiCo Inc. 0.04 Wyeth -0.03Utilities 3.31 -0.82 -0.03 3.24 -0.76 -0.03 Hewlett-Packard Co. 0.04 Texas Instruments Inc. -0.03[Cash] 2.16 0.03 0.00 0.00 0.00 0.00 Wells Fargo & Co. 0.04 ChevronTexaco Corp. -0.03Total 100.00 0.33 0.33 100.00 -1.01 -1.01 Boston Scientific Corp 0.03 Oracle Corp. -0.03

Fund BConsumer Discretionary 16.29 2.18 0.35 14.27 0.60 0.09 Pfizer Inc. 0.17 General Electric Co. -0.29Consumer Staples 5.26 3.02 0.15 8.69 1.92 0.16 Target Corp. 0.13 Intel Corp. -0.16Energy 2.25 -2.86 -0.07 1.84 -2.88 -0.05 King Pharmaceuticals 0.10 International Business Machines C -0.14Financials 11.24 -1.09 -0.12 7.95 -0.13 -0.01 Wal-Mart Stores Inc. 0.07 Cisco Systems Inc. -0.12Health Care 21.63 1.19 0.25 24.96 0.62 0.15 Home Depot Inc. 0.07 Brocade Communications System -0.11Industrials 12.21 -0.81 -0.10 12.90 -5.05 -0.66 Lockheed Martin Corp 0.07 AOL Time Warner Inc. -0.10Information Technology 27.20 -2.68 -0.76 27.13 -3.76 -1.03 Pharmacia Corp. 0.05 Merrill Lynch & Co. Inc. -0.09Materials 1.21 0.11 0.00 0.40 1.81 0.01 Office Depot Inc. 0.05 WorldCom Inc.-WorldCom Group -0.08Telecommunication Servic 1.34 -10.54 -0.15 1.33 -7.37 -0.10 Royal Caribbean Cruis 0.05 Sun Microsystems Inc. -0.07Utilities 1.42 -0.48 -0.01 0.53 -4.36 -0.02 Travelers Property Cas 0.05 Citigroup Inc. -0.07[Cash] -0.04 0.03 0.00 0.00 0.00 0.00 L-3 Communications H 0.05 Nokia Corp. -0.07Total 100.00 -0.45 -0.45 100.00 -1.47 -1.47 Rational Software Corp 0.05 Siebel Systems Inc. -0.06

Bottom Contributors

Bottom ContributorsTop ContributorsPortfolio

Fund Name

S&P 500

Portfolio Returns vs. Benchmarks

Russell 1000 Growth

Portfolio Top Contributors

19

Fund Tracker (Real Time Attribution)

NW Sector Breakdown Sector ReturnS&P 500Return Excess

NW $Chg NW Fund SPX Excess Technology -0.56% -0.60% 0.04%(3,474,992)$ -0.17% -0.01% -0.16% Health Care 0.03% 0.06% -0.03%

Financials 0.09% 0.10% -0.01%Tech $Chg Tech SPTECS Excess Energy 0.10% 0.11% -0.01%

(11,494,062)$ -2.73% -2.57% -0.16% Consumer Staples 0.01% 0.10% -0.09%Consumer Cyclicals -0.02% -0.05% 0.03%

Health $Chg Health SPHLTS Excess Communication Services 0.02% 0.03% 0.00%696,165$ 0.30% 0.50% -0.20% Capital Goods 0.11% 0.16% -0.05%

Transportation -0.02% -0.01% -0.01%Finance $Chg Finance SPXF Excess Utilities 0.05% 0.06% -0.01%

1,855,106$ 0.52% 0.58% -0.06% Basic Materials 0.01% 0.01% 0.00%Miscellaneous 0.00% 0.00%

Energy $Chg Energy SPENRS Excess2,156,410$ 1.76% 1.83% -0.07% Total -0.17% -0.03% -0.14%

Con Staples $Chg Con�Staples SPCSTS Excess NW Fund SPX Excess107,888$ 0.05% 0.84% -0.79% YTD Performance 0.51% 2.30% -1.79%

Con Cyc $Chg Con Cyc SPCCYS Excess(386,830)$ -0.18% -0.61% 0.43%

Comms $Chg Comms SPCMMS Excess505,264$ 0.45% 0.44% 0.00%

Cap. Goods $Chg Cap. �Goods SPCPGS Excess2,300,610$ 1.13% 1.82% -0.69%

Transport $Chg Transport SPXT Excess(386,561)$ -1.46% -1.02% -0.44%

Utilities $Chg Utilities SPXU Excess974,647$ 1.86% 1.60% 0.26%

Basics $Chg Basics SPBMTS Excess187,358$ 0.36% 0.59% -0.23%

Mis. $Chg Mis.9,012$ 0.01%

Go to main interface

Select

Select

Select

Select

Select

Select

Select

Select

Select

Select

Select

Select

Select

20

Measuring Efficiency

• Up/Down portfolio performance– Where has the portfolio’s

performance come from during differing market conditions?

– Are the portfolio’s beta bets correct?

– Based on the market outlook, is the portfolio positioned correctly for the future?

Fund A

12/29/2000-9/5/2001

Days

% up/down

more than index

avg out/underperformance on up/down

dayUp Days 53/85 62% 0.18 bpsDown Days 64/86 74% -0.41 bps

Fund B

12/29/2000-9/5/2001

Days

% up/down

more than index

avg out/underperformance on up/down

dayUp Days 48/86 56% 0.05 bpsDown Days 52/85 61% -0.14 bps

Fund C

12/29/2000-9/5/2001

Days

% up/down

more than index

avg out/underperformance on up/down

dayUp Days 24/73 33% -0.30 bpsDown Days 44/98 45% -0.03 bps

Up/Down PerformanceTechnology Sector

21

Risk Management ReportRisk Analysis Week Ending 1/19/2001

Performance Last Week MTDFund: Nationwide Fund 2.58 (0.19)Benchmark: S&P 500 3.23 1.74

Risk Decompensation Current Prior Week DifferenceActive Risk: 2.84 2.79 2%

Stock Specific 71% 68% 3%Risk Indices 11% 11% 1%Industry 18% 21% -4%

BETA 0.91 0.90 1%

Risk IndicesMgd Bmk Act

LEVERAGE (0.00) (0.13) 0.12YIELD 0.05 0.01 0.04EARNYLD 0.08 0.05 0.03MOMENTUM (0.09) (0.12) 0.03NONESTU 0.02 0.00 0.02EARNVAR (0.07) (0.08) 0.01VALUE (0.03) (0.04) 0.01CURRSEN (0.05) (0.02) (0.03)VOLTILTY (0.11) (0.05) (0.06)TRADEACT (0.03) 0.05 (0.08)SIZENONL 0.02 0.09 (0.08)GROWTH (0.18) (0.05) (0.13)SIZE 0.21 0.36 (0.15)

Industry ExposuresOverweighted Mgd Bmk Act Underweighted Mgd Bmk ActFINSVCS 8.04 5.89 2.16 INTERNET 0.92 2.47 (1.55)CHEMICAL 4.39 2.79 1.60 TELEPHON 3.36 4.61 (1.25)CONSDUR 1.75 0.16 1.59 CMPTRSW 5.56 6.76 (1.21)FOODBEV 4.66 3.40 1.26 SPLTYRET 0.80 1.98 (1.17)CONSTRUC 1.48 0.27 1.21 SECASSET 1.37 2.51 (1.14)

Asset Marginal Contribution to RiskMost Diversifying Least Diversifying Name MCAR Wgt% Name MCAR Wgt%BROADVISION INC (0.24) 0.00 BRUNSWICK CORP 0.04 1.37BROADCOM CORP (0.18) 0.03 FEDERAL NATL MTG ASSN 0.03 3.43EXODUS COMMUNICATIONS (0.18) 0.17 SEMICONDUCTOR HLDRS TR 0.03 0.63SIEBEL SYS INC (0.15) 0.10 BROADBAND HOLDRS TR 0.01 0.48JUNIPER NETWORKS INC (0.14) 0.34 BLACK & DECKER CORP 0.01 1.44CISCO SYS INC (0.14) 1.89 CASH 0.00 3.86MICRON TECHNOLOGY INC (0.14) 0.03 SEALED AIR CORP NEW 0.00 0.73MICROSOFT CORP (0.14) 1.97 SCHERING PLOUGH CORP (0.00) 2.27APPLIED MATLS INC (0.13) 0.22 DOMINION RES INC VA NE (0.00) 1.09MOTOROLA INC (0.13) 0.23 RALSTON PURINA CO (0.00) 0.95

• Portfolio Risk Report– Benchmark relative– Tracking error

• Decomposes Risk– Risk indices– Industries– Stock specific

• Marginal Contribution to Risk by Stock

22

Measure of Risk: 3-Dimesional View of Risk (3DL)

• Risk Loss function integrates Residual Variance, Trading Impact and Active exposure (fundamental conviction most visible here)

0.000

2.000

4.000

6.000

8.000

10.000

12.000RAL OAT BDK VMC BC

3DL= F (x, y, z)where:

x=a stock’s illiquidity (The > the number the more illiquid the stock.)y=active weight in the portfolioz=stock specific risk (According to BARRA’s U3 Equity model.)

23

AD Risk to Return Ratio

-40.0-30.0-20.0-10.0

0.010.020.030.040.050.060.070.0 SANM JNPR BA

FON PCS LU

AD Ratio=(x/y)where:

x=a stock’s excess returny=a stock’s 3DL

24

AD Ratio -- the Numbers

Specifc 6 mth.Company Active Risk Excess ADSymbol Company Name Illiquidity Weight US-E3 3DL Return RatioFON SPRINT FON GROUP 0.022 0.040 47.8 1.614 -53.2 -33.0PCS SPRINT PCS GROUP 0.017 0.040 44.2 1.557 -48.7 -31.3LU LUCENT TECHNOLOGIES INC 0.027 0.110 55.6 1.747 -53.9 -30.8SANM SANMINA CORP 0.005 -0.024 58.7 1.798 80.5 44.7JNPR JUNIPER NETWORKS INC 0.004 0.196 84.7 2.334 127.4 54.6BA BOEING CO 0.018 -0.220 28.8 1.338 76.1 56.9

AD Ratio Report

25

Portfolio Construction & Implementation

• Optimized list of securities with a verylow tracking error to the benchmark. Itincorporates alpha tilts.

• X% of Economic Sector- The weight increases when there aregood stock selection opportunities in thesector.- The weight decreases when active stockselection does not look promising in thesector.

• Rebalanced quarterly: Very Lowturnover.

Alpha ModelSecurities that rank high ona multi-factor quantitativealpha model.

Manager SelectionSecurities that the manager hasresearched extensively and offer verygood prospects for outperformance.

Smart EstimatesCompanies that are highlylikely to beat the consensusearnings estimate.

Other Alpha SatellitesOther strategies that develop whichincrease the fund’s probability of out-performing (i.e. technical analysis)

26

Measuring the Interaction of Risk and Performance

• Use incentives to incorporate quantitative processes and tools into investment products.

• Example:– Compensate PMs on Information Ratio = α / TE– The measure incorporates both return & risk

Large Cap Core Information Ratios 1991-2000

11% 16% 23%31%

43%56%

68%81%

88% 93% 96% 98% 99% 100%

0

50

100

150

200

250

300

-3.0

0

-2.5

0

-2.0

0

-1.5

0

-1.0

0

-0.5

0

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Mor

e

Information Ratio

# of

Fun

ds

Frequency Cumulative %

Source: Zephry Style Advisor

27

Information Ratio -- Calendar Year Consistency

Range and Frequency of Information Ratios

0

10

20

30

40

50

60

70

(3.50) (3.00) (2.50) (2.00) (1.50) (1.00) (0.50) - 0.50 1.00 1.50 2.00 2.50 3.00 3.50 More

Information Ratio

Num

ber o

f Obe

rser

vatio

ns

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 19911992 1993 1994 1995 1996 1997 1998 1999 2000

Source: Zephry Style Advisor

28

Information Ratio -- Annualized Consistency

Source: Zephry Style Advisor

Average IR on an Annual BasisEnding 12/31/2000

IR 3 yr 5 yr 7 yr 10 yr 20 yr(3.50) 7.77% 7.34% 8.68% 7.15% 6.36%(3.00) 3.21% 3.10% 2.98% 3.38% 3.40%(2.50) 4.86% 5.26% 5.26% 4.62% 4.50%(2.00) 6.49% 6.90% 7.50% 7.11% 5.89%(1.50) 7.33% 9.28% 10.07% 8.66% 8.58%(1.00) 11.00% 12.40% 12.77% 11.19% 12.45%(0.50) 10.62% 13.06% 13.95% 12.63% 13.57%0.00 11.34% 12.15% 12.82% 12.85% 14.85%0.50 13.54% 12.18% 11.23% 11.74% 13.44%1.00 9.40% 7.45% 6.05% 7.22% 7.90%1.50 6.13% 5.04% 4.07% 5.84% 5.20%2.00 5.06% 3.47% 2.58% 2.91% 3.82%2.50 1.42% 0.85% 0.78% 1.68% 1.22%3.00 0.90% 0.87% 0.70% 1.29% 1.37%3.50 0.67% 0.51% 0.37% 0.70% 0.80%More 0.24% 0.15% 0.19% 1.01% 0.86%

3 yr 5 yr 7 yr 10 yr 20 yrPercentage Less than -2 22.34% 22.59% 24.42% 22.27% 20.16%Percentage Less than -1 29.67% 31.87% 34.49% 30.93% 28.74%Percentage Less than 0 62.63% 69.48% 74.02% 67.61% 69.61%

Percentage Greater than 0 37.37% 30.52% 25.98% 32.39% 34.61%Percentage Greater than 1 14.18% 10.74% 8.50% 12.43% 12.41%

29

IV. Summary

A Quantitative Platform

Development of Tools &

Techniques

Use of Tools to Design Strategies

Develop Framework to Integrate

Fundamental with Portfolio Construction

Execute Process for Full Scale Portfolio

Management

Measurement & Quality Control

• VBA Heat Matrix

• FactSet Fund Watcher

• BloombergFund Trackers

• Other Customized Tools

• Contribution & Attribution

• BARRA Risk Reports

• Performance SnapSheet

• Information Ratios

• Portfolio Alpha Model

• Sector Alpha Model

• Conditional Betas

• Fund Management Blueprints

• Normal Portfolios

• Dense Core and Alpha Satellite concept

• Tactical & Strategic Response to Varying Market Conditions

• Disciplined Basket Trading

• Active Involvement with Trading

Reports, Info Sharing, & Marketing

Support

• Marketing

• Sales Force

• Conferences

30

Balancing Quant & Fundamental

Quant Fundamental

Scale Can Tilt Depending on:• IC of the process• Design of the product• Acceptance level

High Quant Involvement

Where are you?

Low Quant Involvement

31

Takeaway

Successful investing is a blend of rigorous science and beautiful art, in that order.