Applied Enhanced Index Russell 1000 Strategy
Applied Enhanced Index Russell 1000 Strategy

Applied Enhanced Index Russell 1000 Strategy

 
 
 
Summary

Seeks to achieve Russell 1000 Index-like returns after fees. By employing quantitative models, the team aims to identify 200-300 stocks that, in aggregate, have exposure to factors it believes will drive returns in the current market environment. The final portfolio is designed to have a modest tracking error and align closely with the Russell 1000 Index in terms of industry, sector, style and company size.

≥60%
Typical active share
200-300
Typical number of holdings
 
 
Investment Approach
Philosophy

We believe common, market-oriented factors drive the majority of stock returns.

Over the last 20 years, market-driven factors have explained about 65% of the relative performance of global separate account managers1.

Our goal is to extract value from these return drivers.

Using proprietary methodology, we seek to identify those factors most likely to produce excess returns in the current environment. Through quantitative modeling and screening, we then tilt the portfolio toward stocks with exposure to those factors.

 
Differentiators
Unconstrained by style

Portfolio is positioned to gain exposure to broad market factors the team believes will drive returns in the current environment. The process seeks to protect investors from prolonged periods of style-driven underperformance.

Focused on limiting volatility

To manage tracking error and overall volatility, the team seeks to closely align the portfolio's sector weightings, average market capitalization and beta with the Russell 1000 Index. 

Index-like investing, with an active tilt

By constructing a portfolio that closely mirrors the characteristics of the Russell 1000 Index, and tilting it toward potential alpha-generating factors, investors have the possibility of realizing index-like returns on an after-fee basis.

 
 
 
Investment Process

An index-like portfolio, tilted toward prevailing market factors

  • Using proprietary quantitative models, the team seeks to identify those factors it believes will dominate markets over the next 6-12 months.
  • Stocks are ranked by exposure to desired factors, narrowing the universe to the top quintile (20%) of stocks.
  • To further refine the pool, high-scoring stocks undergo risk decomposition analysis to assess their effects on desired and undesired exposures.
  • A diverse portfolio of 200-300 stocks is constructed to align closely with align closely with the Russell 1000 Index in terms of industries, sectors, styles and market capitalization.
 
 
Portfolio Managers
Head of Applied Equity Advisors Team
30 years industry experience
Executive Director
13 years industry experience
 
 
Insights
Investment Insight
Market Implications of the First 100 Days: What’s Next?
Apr 26, 2017
Morgan Stanley Investment Management’s senior investment leaders discuss how the President’s policy agenda is affecting their outlook on global equity, fixed income and listed infrastructure markets.
Market Outlook
Applied Equity Advisors Monthly Commentary
Sep 30, 2017
Andrew Slimmon from the Applied Equity Advisor’s Team discusses his thoughts and views in the latest commentary for September 2017
Market Outlook
Slimmon featured in U.S. News & World Report
Mar 31, 2017
Don't Bet Against a Good Year for Equities - In this article he explains that while it might be tough to make near-term advances, 2017 could end up being a big year for equities.
 
 
 
 

RISK CONSIDERATIONS

Diversification does not protect you against a loss in a particular market; however it allows you to spread that risk across various asset classes.

There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and may therefore be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Stocks of small-and medium-capitalizationcompanies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. Illiquid securitiesmay be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.

 

1Source: Morningstar. Based on Rolling 18-month R-squared for Global Equity Managers Time Series Regression. Information as of December 31, 2015. Past performance is not indicative of future results. For illustrative purposes only.

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

DEFINITIONS

Active share is a measure of the percentage of stock holdings in a manager’s portfolio that differs from the benchmark index (based on holdings and weight of holdings). Active share scores range from 0% - 100%. A score of 100% means you are completely different from the benchmark.

R-squared measures how well an investment’s returns correlate to an index. An R squared of 100 means the portfolio performance is 100% correlated to the index’s, whereas a low r-squared means that the portfolio performance is less correlated to the index’s.

OTHER CONSIDERATIONS

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The Russell 1000® Index is an index that measures the performance of the 1,000 largest companies in the Russell 3000 Index.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

The typical active share and the number of holdings represent typical ranges and are not a maximum number. The portfolio may exceed these from time to time due to market conditions and outstanding trades. 

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

 

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