Large-Cap Value

Objective

In managing large cap value portfolios, we take a strictly quantitative, bottom-up approach to stock selection, combined with top-down risk management in portfolio construction.

Investment Process

Benchmark
Our objective is to exceed the return of the Russell 1000 Value Index by more than 3% per year over trailing periods of three years or longer.

Investment Universe
 Bridgeway defines large cap as the 500 most liquid stocks on the U.S. stock exchanges, using average volume multiplied by share price to gauge liquidity. We divide this universe into growth and value companies based on common financial measures such as price-earnings ratio, price-book ratio and dividend yield, leaving us with 250 large-cap value stocks to consider for investment.

Security Selection and Weighting
The 250 large cap value stocks are run through six different computer models to determine stock selection. The models are proprietary, but they seek to identify those value stocks which are cheaply priced relative to certain financial measures of worth.

Once a model identifies a security for inclusion in the portfolio, security weighting is a function of several factors as follows:

• The model under which the stock was selected
• Sector and industry diversification considerations
• Absence or presence of similar holdings within that industry or sector
• Liquidity considerations

Sector Weightings
While sector exposures are monitored closely, there is no absolute standard for acceptable under- or over-weighting of sectors. Instead, we attempt to manage risk by modeling the relative performance of various sectors under different market conditions. Large-cap stocks typically have less market volatility than small stocks; value stocks tend to be less volatile than growth stocks.

Sell Decisions

Factors which may result in the sale of some or all shares of a particular security include:

• Relative attractiveness of new model recommendations
• Deteriorating financial strength in underlying company
• Portfolio risk considerations (sector, industry diversification)
• News of a merger or other external factor that may drive future price movements

All sales are executed subject to tax efficiency and liquidity considerations.

Additional Considerations

• We seek to be 100% invested in large-cap stocks at all times.
• Initial position weights are usually 1-2% of assets; trimming may occur if a sector or industry becomes overweighted or if the market cap of a holding falls below the size of our charter.
• Portfolio turnover for this style is relatively low, generally in the 25% to 40% range annually (plus any tax loss harvesting)
• Foreign stock exposure is limited to a maximum of 10%. Only securities traded on U.S. exchanges are considered to ensure consistent GAAP reporting.
• Options and other derivatives are generally not used in these accounts.

Available Investment Vehicles