Management Technique

In order to understand our investment philosophy it would be useful to first understand the background to our equity investment process. Our company has been using quantitative methods since the 1980's but only in the bond management area. In 1995, we wanted to expand our know-how to include investments in equities after reading various theoretical works published by a well-known and respected American professor named Robert Haugen.

In these studies on "Minimum Variance", Professor Haugen makes an astonishing observation about the US equity market. He stated that the return of a fully invested equity portfolio that weights the stock to minimize total risk achieves a return that is higher than the return of the S&P 500 index. This portfolio has the lowest possible variance and is therefore referred to as the "Minimum Variance" Portfolio.

Our management procedure starts with the definition of a customized universe. In order to achieve this customization, we start by looking at those indices that offer broad diversification potential.

This customized universe should be large enough to permit us to construct a portfolio combining stocks that are uncorrelated. According to our experience, this universe should include at least 200 stocks. For our existing European funds, we use the DJ Europe STOXX 600 index as a starting universe.

In a second phase, we filter this universe in order to take out those companies which we wouldn't feel comfortable investing in, using various proprietary liquidity, credit or specific filters.

At this point the customized universe for the existing European fund mentioned earlier consists of 400 stocks.

Once the customized universe is established we start an optimization procedure that enables us to select the stocks that will be invested in our "Minimum Variance" portfolio.

For this task, we use a multi-factor risk model that calculates for each stock its risk profile.

Once the optimizer comes with a proposition for a new "Minimum Variance" portfolio, we conduct a fundamental analysis on the new companies that have been selected.

At this point our "Minimum Variance" portfolio will contain approximately 80 stocks.