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Fan Asset Management LLC |
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Note: Performance presented here is gross of fees; please see the disclaimer for the regulatory disclosure. All returns are annualized except for year-to-date returns which are cumulative.
Product Description
The Sustainable Earnings Growth (SEG) Large Cap Growth strategies implement Dr. Fan’s General Capital Asset Pricing Model (GCAPM) at the individual stock level in the large capitalization growth-oriented stock universe. FAM defines “good” SEG stocks as ones that have stronger earnings fundamentals and that are under more favorable macro economic and business environments than their peers. As stated in our investment philosophy, FAM believes that good SEG stocks have a better chance of increasing their expected returns and/or lowering their beta risk premiums, hence, they have a better chance of generating higher ex-post investment returns. The SEG strategies require both top-down macro analyses and bottom-up stock analyses. The top-down macro analyses examine the capital market’s forthcoming macro economic and business environments, while the bottom-up stock analyses identify stocks with solid earnings and solid earnings growth fundamentals. Combining FAM’s top-down and bottom-up analyses, FAM identifies the stocks with the strongest fundamentals under the most favorable macro environments and applies our system of rigorous risk management to construct FAM’s SEG portfolios. For the Large Cap Growth SEG strategies, the investment universe and performance benchmarks can be the S&P 500 Growth index, the Russell 1000 Growth index, or any other large cap growth universe mandated by the client. (back to top)
Assuming an average 5% tracking error over a full market cycle of 3 to 5 years, FAM’s SEG Large Cap Growth Strategies are projected to outperform 2% to 5% per year over their assigned benchmarks. Our track record since the strategy’s April 1997 inception has demonstrated an outperformance over the Russell 1000 Growth index by approximately 1.47% per year gross of fees as of the end of September 2011 (see regulatory disclosure in the Disclaimer section). (back to top)
In general, stocks have to pass three hurdles in order to be included in the portfolio. First, a stock has to have higher-than-average stock rankings according to Fan Asset Management’s stock selection models. Second, a stock must pass the top-down macro analyses – i.e. it must be in a favorable macro business and economic environment. Third, a stock must pass the Fan Asset Management’s portfolio managers’ hands-on qualitative examination. (back to top)
FAM’s SEG Strategies’ industry and sector weights are initially shaped by FAM’s security selection process. By aggregating the strongest SEG stocks, defined by FAM’s bottom-up and top-down analyses, into FAM’s SEG portfolios, the portfolios naturally overweigh attractive industries and attractive sectors. To control portfolio risk, the SEG portfolios are subsequently further constrained by limiting their active (relative to assigned benchmarks) and absolute exposure in specific sectors or industries. The sector or industry exposure constraints are mandated in part, by client investment guidelines, and in part by FAM’s risk management process. (back to top)
FAM manages portfolio risk at both an absolute level and a relative (to the benchmark) level. Based on our investment philosophy, SEG strategies only invest in assets that are expected to reduce their beta risk premiums. Hence, through the nature of FAM’s stock selection process, SEG portfolios are constantly minimizing their beta risk premiums. To control the relative risk exposure of the SEG portfolios, we limit their concentration in individual stocks, industries, and sectors, as mandated by client investment guidelines, as well as by FAM’s risk management procedures. In addition, overall portfolio tracking error risks are further controlled by quantitative risk models. Normally, portfolio tracking error risks are maintained at 4% to 6% range. (back to top)
For the SEG strategies, there are two triggers for portfolio turnover: changes in stock fundamentals, and changes in the capital market’s macro environment. SEG strategy turnover is typically held to the 30% to 100% range. (back to top)
(September 2011)
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