We strive to achieve long-term capital appreciation independent of equity market conditions, by aiming to deliver a steady stream of stable returns over time. The Fund strives to accomplish this by establishing long positions in attractive stocks, short positions in unattractive stocks, and attempting to neutralize any other factors including equity market and interest rate exposures. The process is designed to deliver low correlation to other assets classes, while its global reach seeks to increase opportunities for alpha generation and improve diversification and risk management.
Our investment team has expertise in both of these areas and utilizes a process specifically designed to achieve results in each. Our approach to investing is primarily bottom up – we begin by identifying attractive and unattractive stocks individually regardless of region or industry. We then construct a portfolio that will be long attractive stocks and short unattractive stocks, in a manner that seeks to neutralize any factors other than those that we believe are positive elements of the stock selection process.
Our process can be distilled down to three core activities.
- Long Security Selection– Identify attractive stocks across as many markets as we can access
- Short Security Selection– Identify unattractive stocks across as many markets that may allow short selling
- Portfolio Construction– Attempt to eliminate any unintended exposures to risk, including stock market direction
Long Security Selection
Our Process begins by identifying stocks that we want to own in the portfolio. We start with aligning stocks by Peer Groups, so that our stock selection model compares stocks consistently based on how certain industries operate around the globe. For example, some stocks are grouped by their industry codes, regardless of what country they are in because the industry is more global in nature. Others are segregated further into regions or countries because they behave differently based on the region or country where they are located.
The next step is to assess individual stocks within these groups according to their Alpha generating attributes (our “Alpha Factors”), using our proprietary stock selection model tailored to each asset class we invest in. We focus on U.S. stocks with total capitalization greater than $100 million and Non-U.S. Developed Market stocks larger than $1 billion. We believe our global orientation provides a more diversified source of Alpha, as well as a stronger risk management capability. The objective here is to assess the relative attractiveness or unattractiveness of individual securities, which will inform our long and short stock selection decisions.
Our quantitatively driven models are designed to capture market inefficiencies within and among stocks, focusing on factors in three key areas: Market Dynamics, Value, and Earnings Quality. Because markets are fluid, these factor exposures must be actively managed. The Market Dynamics factors are assessed with an eye toward exploiting short term trends as investors tend to under react to information in the short-term. This model delves into such factors as earnings estimate revisions, stock price momentum, and recommendation revisions. Valuation factors are designed to capture mean reversion as investors extrapolate short-term data out over longer periods and over react in driving stock prices. This model investigates the impact of key valuation factors. The Earnings Quality factors looks to incorporate information about the quality of earnings that investors tend to overlook. Factors in this area include assessing more qualitative elements of quantitative outputs, like profitability, capital allocation, accruals and efficiency.
Ranking stocks according to their factor scores in these key categories forms the core of our long and short stock selection processes.
Short Security Selection
Successfully shorting stocks involves borrowing stocks we believe will decline in value and repaying the lender with less valuable shares if they do lose value. The Adviser to the LMCG Funds, has extensive experience shorting stocks, specifically at the local country level. The Adviser believes that there are abundant inefficiencies in global markets accessible through shorting. In addition, short positions can be constructed to offset risk exposures of long positions, particularly exposure to market direction. Ideally, the final portfolio is a true “market neutral” investment that seeks deliver the pure alpha of our investment process plus the yield of U.S. Federal Funds rate less expenses.
The shorting of stocks will result in delivery of cash to the fund. We do not attempt to take any risks with this cash other than receiving the US Federal Funds rate minus a fee from the prime broker. While other strategies will use futures contracts to take additional risks in areas such as duration, credit exposure, or even equity market direction, our intent is to be conservative and focused on producing returns from our long and short equity trading.
We use portfolio construction tools to make informed decisions and avoid the use of black box quantitative techniques. Our management attempts to provide control of risk exposures such as market direction, market cap, industry group, economic sectors and currency. The portfolio is rebalanced frequently in an attempt to obtain an optimal combination of return maximization and risk management.
We look to invest between 50-75% of the assets in small to mid-sized U.S. companies, and 25-50% in mid to large-sized international companies. We believe that these areas offer the best opportunities for exploiting stock price mis-valuations and provides adequate depth and liquidity to keep trading costs reasonable..
We use portfolio construction tools to make informed decisions and avoid the use of black box quantitative techniques. We believe that the proprietary nature of our risk management provides superior risk management of risk exposures such as market direction, market capitalization, industry and economic sectors, and currency. The portfolio is rebalanced frequently in an attempt to obtain an optimal combination of return maximization and risk.
Alpha – is the incremental return of a manager when the market is stationary. This risk-adjusted measurement takes into account both the performance of the market as a whole and the volatility of a manager. A positive alpha indicated that a selected portfolio has produced returns above the expected level at that level of risk, and vice versa for a negative alpha.
Beta – A measurement indicating the volatility of a manager relative to a chosen market. A beta of 1 means a manager has about the same volatility as the market. A beta higher than 1 means the manager is to that extent more volatile than the market, while a beta lower than 1 means less volatile.
Market Events Risk. Turbulence in the financial markets and reduced liquidity in equity, credit and fixed-income markets may negatively affect issuers, which could adversely affect the Fund.
Market Neutral Style Risk. As a result of the Fund’s use of short selling, the Fund will not participate to the same level as a long only mutual fund in a “bull” market.
Short Selling Risk. The Fund may engage in short sales of securities by borrowing a security and then selling it. The Fund may incur losses from unsuccessful short sales, and due to the nature of short selling, such losses may be theoretically unlimited. Short selling requires segregated account of cash and/or liquid assets with Fund’s custodian which may lead to high levels of cash or liquid assets. A more detailed discussion of the Fund’s risks, including risks that are unique to the Fund, can be found in its prospectus.
Equity Risk. The Fund’s equity holdings may decline in value because of changes in price of a particular holding or a broad stock market decline.
Foreign Investments Risk. Foreign investments may be subject to the same risks as domestic investments and to additional risks which include international trade, currency, political, regulatory and diplomatic risks, which may affect their value.
There can be no guarantee that any strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential loss of principal.
Investors should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. You may obtain a prospectus by calling (877) 591-4667. The prospectus should be read carefully before investing.
Foreside Fund Services, LLC.