Investment Universe, Process, Strategy and Benchmark – How does the Fund Manager invest? (ISIN: LU0256843979)
Investment Philosophy
The Allianz RCM US Equity Fund (-A- EUR) invests in undervalued companies undergoing positive change. We believe investor sentiment fluctuates more widely than underlying fundamentals and that low expectation/valuation provides more downside risk protection and more upside potential. This results in mispriced opportunities. We are able to identify these opportunities through our disciplined investment process, which is built upon stock screening and fundamental research.
Investment Process
The investment process reflects our philosophy: we invest in undervalued companies with positive catalysts for change. The process begins by selecting stocks from the top portion of the screened initial investment universe and allows us to focus our research on a small group of companies we feel reflect our philosophy. When selecting stocks for further research, we consider various business and fundamental aspects of the company: its uniqueness or market share leadership in each industry, pricing power of its products, franchise value, competitive landscape, etc.
After selecting a company for further research, we initiate the step of conducting company research, equity valuation and stock selection. This includes research of the company’s business lines, competitive landscape, fundamentals and future prospects, and finally conducting equity valuation work to forecast the company’s future upside and downside target prices. Our research efforts focus on a variety of Growth Drivers (such as barriers to entry, pricing power, sustainable earnings growth and new product cycles) and Quality Drivers (such as integrity and quality of management, sound accounting principles, well-capitalized balance sheet, and favorable cash flow outlook). The stock selection decision is the most important part of our investment management process.
The portfolio is constructed with the most attractive stocks that are identified by the Team in the prior investment process steps, considering the portfolio’s active risk vs. the benchmark. The number of stocks held in the portfolio typically ranges from 40 to 80 stocks. Conversely, a stock may be sold or trimmed for several reasons. More often, they rely on their investment outlook and expectations and any other conviction they have built as a part of the research process.
The overall investment management process ends and restarts with a performance attribution analysis. This analysis allows the Team to evaluate the sources of value-added across the investment steps, and also to examine the stock selection vs. industry/sector effects. This work enables us to make ongoing improvements, and refine and strengthen the investment process.
The Allianz RCM US Equity Fund’s preferred benchmark is the S&P 500 Index. This benchmark corresponds well with our in-house large cap, core definition and is a good representation of the leaders of the U.S. equity market.
The S&P 500 is comprised of fewer securities than the Fund’s initial universe. Because we carefully analyze and control risk versus the benchmark, we expect to generally follow the benchmark’s style and positioning over time. However, taking active positions against the benchmark is the main performance driver for this strategy and we occasionally invest in stocks outside of the benchmark.
Performance Review 2005
Seung Minn: "In 2005, we outperformed the S&P 500 Index by 750 basis points. Most of the outperformance came from stock selection. In particular, stock selection within Technology had strong positive impact on relative performance. Sector allocation also had positive contribution to the relative outperformance."
Performance Review 2006
Seung Minn: "In 2006, we underperformed the S&P 500 Index by 16 basis points. While stock selection provided positive attribution, negative attribution from sector allocation more than offset this gain. Stock selection within Technology helped performance. However, stock selection within Health Care hurt performance."
Performance Review 2007
Seung Minn: "In 2007, we outperformed the S&P 500 Index by 587 basis points. The outperformance was attributable to both stock selection and sector allocation. Stock selection within Technology and Energy provided significantly positive contribution to relative performance. However, stock selection within Health Care hurt performance."
Performance Review 2008
Seung Minn: "In 2008 we underperformed the S&P 500 Index by 62 basis points. Underperformance was primarily attributable to stock selection, with sector allocation contributing positively to relative performance. Not owning Exxon Mobil was a leading detractor from our performance. Other notable detractors during the year include Apple and Corning. On the positive side, leading contributors to relative returns included Genentech and Johnson & Johnson. Decisions to avoid AIG, Fannie Mae, Lehman Brothers and Merrill Lynch also positively contributed to relative performance."
Performance Review 2009
Seung Minn: "In 2009 we outperformed the S&P 500 Index by 14.9%. More than 80% of relative outperformance was attributable to security selection. Sector allocation also contributed positively to relative performance. Leading contributors to relative returns were: Apple, Freeport McMoRan Copper & Gold, Starbucks, and Corning. Performance was also helped by a large position in Genentech, which was acquired by Roche earlier in the year, and the decision not to own Exxon Mobil. Detractors from relative returns included: Genzyme, Lockheed Martin, and the decision not to own benchmark names Google and Microsoft."
Performance Review 2010
Seung Minn: "For the year 2010, the Fund posted strong gains, slightly underperforming its market segment. For this evaluation period, performance was mainly driven by sector allocation, while stock selection was a negative contributor to relative returns. On a sector basis, our positioning in industrials and energy had the largest positive impacts on performance. Conversely, the largest negative impacts came from our positioning in the healthcare as well as the consumer discretionary sector."
Performance Review 2011
Seung Minn: "In 2011 the fund lost slightly in terms of value, while its market segment performed quite well. The negative performance was driven by both stock selection and sector allocation. On a single stock perspective, Freeport-McMoRan Copper was the top detractor from performance in 2011. Among the Fund’s stocks that positively influenced performance, successfully avoiding Bank of America and Citigroup, had the biggest impact. On a sector basis, performance was hurt mostly by our positioning in utilities and consumer discretionary. Conversely, financials had the largest positive impact on relative returns."
Performance 2012 - Year-to-Date
Seung Minn: "During the month of January the Fund performed roughly in line with its market segment. For this very short evaluation period, performance was driven by both sector allocation and stock selection. Among the top contributors to returns were Freeport-McMoRan Copper & Gold, Caterpillar, EMC Corporation and Autodesk. On a sector basis, the portfolio’s positioning in utilities, consumer staples and materials contributed positively to relative returns. Conversely, the portfolio’s exposure to energy contributed negatively. On balance, the impact of sector allocation was positive."
Performance since 2007
Seung Minn: "For the rolling performance time periods one year or longer, the active performance is mainly driven by stock selection. During the past five calendar years, the Fund posted gains in three of five years. In the two years when the Fund lost in terms of value, performance was primarily impacted by weak stock selection. In each year, most of the performance can be explained by successful or unsuccessful stock selection work."
The Portfolio Management Team, is made up of three individuals, Seung H. Minn, Senior Portfolio Manager & CIO of the Disciplined Equities Group, Kimberlee Millar, Analyst & Portfolio Manager and Shibin Xie, Analyst and Assistant Portfolio Manager. The team is led by Seung Minn who is responsible for the portfolio management of the Fund: from the investment philosophy, to security research & selection, portfolio construction and daily monitoring of the portfolio. Any of the Team members can recommend stocks for further research; however, the ultimate decision on what stocks should be followed up and researched rests on Seung Minn, the team leader and Senior Portfolio Manager.
