Background: While working as risk consultants at Barra in 1990’s, the first two authors decided to start collaborating on a research project with its first paper titled “Application of Volatility in Portfolio Construction” [1]. The third author was then a risk manager of a financial institution which was a client of Barra’s. Bringing his expertise in portfolio risk management, he joined the research team. Aim: The core of this paper lies in the construction of an investment portfolio with a main objective of value appreciation while examining its tracking error [1]-[3], a risk measurement with reference to a benchmark [1] [4]. The authors believe, while tracking error measurement is a common tool for portfolio risk management, total risk measurement is more important. The management goal is to minimize drawbacks using the technique of risk budgeting. These topics will be discussed in future research papers.
RCM (a company which is now fully integrated into Allianz Global Investors) is a growth style stock selection driven equity manager. We believe that fundamental research combined with non-financial research, GrassrootsSM, allows investment managers and analysts to identify opportunities ahead of the market and thereby benefit from price appreciation. Central to RCM’s investment philosophy is the belief that rigorous fundamental research of securities combined with a disciplined valuation methodology will enable us to outperform benchmarks [
RCM invests in high quality growth companies whose growth in earnings will provide returns in excess of the market while preserving clients’ principal in down markets. A disciplined identification process is facilitated through fundamental research and a series of valuation disciplines, purchasing those securities whose growth in earnings/dividends and/or cash flow will provide a total return in excess of the market. The investment approach seeks to generate superior returns over a full market cycle.
Portfolios are constructed by taking into account of stock selection considerations. We aim to build portfolios that contain the very best individual stock opportunities across the Pacific Rim region. Our stock selection is the result of a 5-step consensus decision-making process which is shown in
The investment process can be summarized according to the following 5 steps:
Stock ideas are generated at the market and sector level from the stock universe. We identify stocks which show good potential for both secular and internal earnings growth. Through our extensive research and local market awareness, we aim to avoid predictable threats to a business, whether technological, regulatory, or via competition. When examining a company, we look at a balance between growth prospects, quality of the company and valuation.
Upon identifying growth and quality, we assess whether the company is available at reasonable value. We use, among other measures, P/E relative to market, book value and price to cash flow to measure a company's value. RCM’s emphasis on proprietary fundamental and grassroots research has led the company to construct RIMS Express, our central repository of analytical data. This system enables detailed analysis of individual stocks, risk indicators, valuations and company research notes. The system also enables the user to conduct detailed analysis of both benchmark data and portfolio data.
We employ a common voting system to assess overall opinions and determine stock weightings. Each member of the relevant sector team has an opportunity to register opinions ranging from disfavour to strong preference,