Investment Process

GSIF Large Cap Core Strategy

Circular flow chart showing bubble 1 leads to bubble 2 which leads to bubble 3, which leads to bubble 4, which leads back to bubble 1. Bubble 1 reads: Planning, a) establish Eligible Universe based on S&P 500; b) Apply fundamental bottom-up approach. Bubble 2: Stock Selection, a) Each sector will be assigned to multiple student members; b) Find stocks with potential to outperform over the long term. Bubble 3: Portfolio Construction, a) characterize stocks based on value measure (e.g., book-to-market); b) set stock weights within sectors in proportion to value measure. Bubble 4: Implementation; a) sector neutral; b) Use sector ETF's to aid with diversification; c) Constraints on quantitative value-tilt optimization; d) Rebalance portfolio; e) Trade efficiently

The GSIF Investment Process is designed to capitalize on the opportunities in the market in which a company’s price does not reflect its true fundamental value. In addition, specific features of the Investment Process manage tracking error – the risk of the strategy relative to its large-cap core benchmark. In implementing the portfolio, the strategy also provides an opportunity for added performance by tilting the portfolio weights toward value-oriented stocks. The Investment Process can be thought of in four distinct stages: Planning; Stock Selection; Portfolio Construction; and Implementation.

Planning

The process defines the eligible universe of available investments based on maintaining consistency with the large-cap core mandate and the S&P 500 benchmark. Any stock within the S&P 500 Large Cap Index is eligible for the portfolio. GSIF members apply a bottom-up fundamental research process to analyze stocks

Stock Selection

Each sector is assigned to multiple GSIF members to conduct fundamental research into companies within that sector. Team members conduct in-depth research to identify current sources of revenues and costs and to project future growth opportunities. The fundamental research also aims to identify the risks facing a company, including competitive threats and potential overall economic, environmental, or regulatory impacts on the company’s business. Stocks are selected for the portfolio based on the team’s view of the potential for contributing to the performance of the overall portfolio.

Portfolio Construction

Within sectors, an individual stock’s target weight is set in proportion to the stock’s value measures, such as dividend yield and price-to-book ratios.

Implementation

Using the selected stocks, the portfolio is implemented to manage risk and to trade efficiently. In terms of risk management, the portfolio is sector neutral, whereby portfolio sector weights are set to approximate the sector weights of the benchmark S&P 500 index. By maintaining a sector neutral portfolio, tracking error due to relative sector returns is reduced.

The GSIF seeks to implement the portfolio as efficiently as possible. GSIF students monitor the portfolio on an ongoing basis, even during periods when classes are not in session, and make timely reports on the performance of the portfolio. As sector teams evaluate new information and decide to buy or sell names, the portfolio is rebalanced in a disciplined manner. During rebalancing, trades may be made in stocks whose portfolio weight is significantly under- or over-weighted relative to its target weight or when necessary to maintain sector neutrality. In all cases, the implementation is designed to consider whether the expected benefits outweigh the direct and indirect costs of trading.

For more information about the Graduate Student Investment Fund, please contact Dr. Timothy Marlo at tmarlo@siu.edu.