Quick Take: Rosemary Macedo uses a top-down, quantitative, multi-factor model to select stocks from around the world for the Bailard International Equity Fund (BBIEX). Under her discipline, she seeks to create a broadly diversified portfolio by initially ranking countries, sectors and individual securities according to various criteria and then evaluating their relative attractiveness.
Macedo currently works with just two associates, using computer models to sift through mountains of data. Despite the small staff, the $169-million fund has handily outperformed its global equity peers recently. For the one-year period through Nov. 30, 2005, the fund gained 19.5%, versus a 13.4% return by the peer group. Over three years, the fund rose an annualized 24.5%, compared with an 18.6% showing for the peers. Over five years, the fund again beat the peer group, 7.1% to 3.4%.
As of Sept. 30, 2005, the fund had the bulk of its assets invested in three developed markets: Europe (41.0%), Japan (21.6%) and the U.K. (16.8%). Asia, excluding Japan, accounted for a 9.2% weighting, with Latin America representing 3.5%. Overall, the fund holds more than 400 stocks spread out across thirty countries.
The fund's expense ratio of 1.35% compares favorably with the peer average of 1.57%. The fund's volatility, as measured by standard deviation, comes in at 12.17, nearly equivalent to the peers' 12.05 average.
The fund's turnover ratio of 69.0% closely matches the peers' 72.4% average. However, Macedo emphasizes that any period of market volatility could boost the fund's turnover.
The fund's name was changed in 2005 from Bailard Biehl & Kaiser International Equity Fund in connection with the change in name of the investment adviser. Macedo has run the portfolio since November 1995.
The Full Interview:
S&P: Can you describe your investment philosophy?
MACEDO: We use a dynamic approach based on insights from behavioral finance, which focuses on why different investment strategies work and when they should work best. No single strategy or selection criteria works all the time. If you use a dogmatic approach, you can do very well while that particular style outperforms. But when it falls out of favor, you're dead in the water until conditions change.
Behavioral finance suggests that value strategies profit from investor overreaction, which you tend to see when there's a great deal of uncertainty and volatility in the markets. When our models see signals of market volatility, we increase our weighting in stocks with value characteristics in our overall selection process. During periods of underreaction, which typically feature low market volatility, we know that's a good time to increase our weightings in securities with growth characteristics.
S&P: How big is your investment universe?
MACEDO: It's comprises over 4,000 stocks around the globe and we can invest in up to 50 countries. We look at the most liquid, large-cap stocks in all major developed and most developing markets. We do hold small-cap stocks, but not micro-cap.
We stay very diversified. We're not doing the type of bottom-up analysis that gives you such a thorough view of each company. We're trying to profit from much larger patterns.
S&P: How do your computer models work?
MACEDO: We give a "score" to each country, and each stock within a country. Our model starts with about a dozen selection factors, including growth, value, estimate revisions, liquidity, and market risks.
For country selection, we look at global conditions. Our country model evaluates the characteristics of each country, scores and weights them, then generates a relative ranking for each based on global conditions.
Then we select individual stocks in a given market and weight them according to local conditions. That's important because countries aren't completely synchronized with each other. For example, Japan and the U.K. are in completely different stages of their business cycle most of the time.
What we do that's perhaps different from others is our ability to change our weights -- sometimes our emphasis will be on value-type characteristics, other times it will be on growth or momentum characteristics. Sometimes we're just cautious, trying to own cheaper markets and stocks that aren't volatile. It's not that we go from extreme value to extreme growth. We stay very core, but the weighting of these dozen factors are changing all the time.
S&P: How often do you review the selection factors?
MACEDO: All of the weights are calculated at least twice a month, and stocks are scored every day. That's not to say we need to change every day -- opportunities don't come up so evenly spaced. There can be long periods where we stick with what we have. We're very opportunistic about rebalancing and turnover.
S&P: What is your process of buying and selling stocks?
MACEDO: First, we look at our country model and see if there have been changes in terms of the relative rankings of the countries. We look at all countries together to make sure the weights in the portfolio are still aligned with our rankings. If we need to change the country weight, then we look at which stocks to buy in the new country and which to sell in the old country.
In the absence of country allocation changes, we review the stocks within each country every one to three months depending on conditions in that country. If things are calm and steady, the rankings don't change quickly. If there's a lot going on in a given market, we know that those rankings are evolving, and we'll look into it more frequently.
S&P: How do you manage risk in the portfolio?
MACEDO: Diversification, above all. We're diversified across several regions, sectors, and by the number of companies in the fund. Our portfolio construction balances prospective return against risk.
S&P: Have you had a lot of changes in the past year?
MACEDO: Probably the biggest one relates to Japan, which has a larger weighting in the fund than it had a year ago. For several years we were very overweight in Asia relative to Europe. That's less true now as Asian stocks have appreciated.
S&P: What is your outlook for global markets in the next year or two?
MACEDO: We are fairly positive. I think the biggest risk is if liquidity starts to dry up and risk aversion increases. That combination could really hit the emerging markets. Other risks I see are such things as higher oil prices, the potential collapse of consumer spending, and perhaps even the decline of property values.
However, looking at valuations globally, foreign stocks remain inexpensive relative to the the U.S.