Diversified Large Cap Value Equity

Objective

We seek to outperform the Russell 1000® Value Index by investing in undervalued large-cap stocks, as identified by a low price-to-earnings (P/E) or price-to-book (P/B) ratio, while maintaining a low tracking error, typically between 2–4% versus the index.

Investment Process Summary

We manage the portfolios with a disciplined combination of quantitative and fundamental investment styles. Our investment strategy employs a deselection approach with the goal of identifying and avoiding undervalued stocks that we believe will have difficulty outperforming the benchmark. Our low tracking error discipline enhances long-term returns by reducing significant drawdowns versus the benchmark. We utilize a team-oriented process with experienced investment managers.

Investable Universe

Within the universe of U.S. equities, we identify stocks with:

• Market capitalizations among the top 800 largest U.S. stocks
• P/E ratios among the lowest 40% or P/B ratios among the lowest 25% in this universe

Deselection Process

From the resulting 300-400 large-cap value companies, we quantitatively eliminate stocks with:

• Weak stock price momentum, as these stocks often continue to underperform
• High relative share issuance, which often precedes weaker stock returns

We perform our fundamental analysis on the remaining 200-300 companies. We seek to understand why each is undervalued to avoid stocks that are unlikely to return to a normal valuation. Our focused research process allows us to efficiently manage a diversified portfolio of companies with desirable characteristics. Our in-depth review includes:

• Adjusting reported earnings and book values to purchase only genuinely undervalued stocks;
• Eliminating stocks with significant pre-announced earnings deterioration; and
• Excluding stocks with severe fundamental decline or substantial financial, legal, or product risks.

Portfolio Management

The portfolio holds approximately 175-250 stocks to diversify risk and enhance liquidity. We initially weight each stock’s position proportional to its market capitalization. We will deviate from strict capitalization weight if necessary to maintain our tracking error targets versus the index. Industry and sector weightings are the direct result of our bottom-up investment process and our tracking error management.

Typically, we sell a stock when: its P/E and P/B ratios are both no longer undervalued, its market cap no longer qualifies as large cap, its price momentum lags the market sufficiently to trigger our stop loss control, a substantial number of new shares are issued, or fundamentals deteriorate significantly.