We put our philosophy into action with a four-step process that is driven by our proprietary model and focused on bottom-up stock selection.
The model produces a computerized score card for each stock in our universe that is based on a strict set of decision rules embodied in various factors. By following these rules, Ativo avoids the behavioral biases that are inherent in traditional, fundamental approaches. We invest with objectivity, never following the herd or “falling in love” with the stocks we own.
It is important to note that, not only is our model proprietary, its component factors are also unique to Ativo. Consequently, our factors are not subject to the decay that occurs with “off-the-shelf” factors, which lose their predictive ability as more and more investors use them.
Step 1: Macro Assessment
Ativo’s investment process begins with an evaluation of the global economy and stock market. Our goal is to understand the current environment and how it might influence the results of our model.
Step 2: Accounting Adjustments
We gather extensive accounting data on more than 30,000 companies. Our broad investment universe gives us the flexibility to invest in various markets and sectors around the world, which expands our ability to generate alpha.
Because accounting regulations distort the real economic performance of companies, we make a series of adjustments to the data.
Step 3: Rules-Based Analysis
Ativo’s proprietary model scores each of the stocks in our universe from 1 to 100 on various component factors, 100 being the best score. The model then weights and combines the scores to arrive at an overall rating for every stock—a rating known as the “Ativo Attractiveness Score™.” Like the factor ratings, the Ativo Attractiveness Score ranges from 1 to 100.
Step 4: Portfolio Construction
Now that our model has calculated an Ativo Attractiveness Score for every stock in our universe, we are ready to build the portfolio.
Rank the Universe
We rank each stock based on its Ativo Attractiveness Score, eliminating those that do not meet our thresholds for liquidity and market capitalization. We also eliminate stocks that are prohibited by the client’s statement of investment policy.
Scale and Re-Rank the Most Attractive Stocks
We take the stocks in the ranked list and scale their Ativo Attractiveness Scores up or down based on their size, style, “risky-defensive” characteristics and country. For example, if investors are risk averse and favoring high-quality stocks, we would modestly increase the scores of stocks with the strongest financial structures. Similarly, we would modestly lower the scores of stocks domiciled in a country that is deemed unattractive by our proprietary country ranking model. The Ativo Country Ranking Model™ uses 19 macroeconomic and top-down aggregate factors to rank over 30 countries in both developed and emerging markets.
We also scale the Ativo Attractiveness Scores based on how a stock would impact existing country, sector and industry exposures relative to the benchmark. Once we have completed this scaling process, we re-rank all of the stocks.
Perform a Qualitative Review
We consider the highest-ranked stocks as portfolio candidates. However, before making our final selections, we make a qualitative assessment of each one. Our goal is to identify any disqualifying information that has become available on the company. Disqualifying information typically involves breaking news, such as M&A activity, legal and regulatory developments, and geopolitical events. We also look for non-recurring items in a company’s income statement that temporarily inflate its earnings, such as a gain on the sale of a business unit.
We create a diversified portfolio of highly ranked stocks that have passed our qualitative review. In making our selections, we use a proprietary optimizer that helps us maximize the adjusted Ativo Attractiveness Scores of the stocks in the portfolio while reducing tracking error. Position sizes are close to equal weights.