How Not to Lose the Forest for the Trees: Applying INTECH’s Volatility-Capture Process to Emerging Markets Equity Investing
Institutional investors have various reasons for considering allocating a portion of their overall portfolio to emerging market equities (EME), including diversification, record-low interest rates in the U.S. and the appeal of the higher returns that these fast-growing economies have historically produced.
Vassilios Papathanakos, Ph.D. Executive Vice President Deputy Chief Investment Officer (609) 497.9505
Nancy N. Holden, CFA Senior Managing Director Head of Client Relations (720) 210.1267
However, before deciding to invest in EME, investors should not turn a blind eye to the volatility of these stocks compared to their developed-world counterparts. Consider: as of June 30, 2016, the MSCI Emerging Markets Index returned 3.88% annually over the past ten years, with a standard deviation of 23.52%. For the same period, the MSCI World Index returned 5.02%, but with a standard deviation of 16.51%. (In simple terms, the standard deviation of the return of an investment is one way to measure its volatility: the higher the standard deviation, the more volatile the investment.) For years, it has been assumed that to outperform the stock market or a benchmark, over the long term, requires: having a deep understanding of the macroeconomic and political environment, particularly in EME, as well as company-specific fundamentals; accurately predicting stock returns; and then constructing a portfolio based on these factors. But there is another approach that does not require factor analysis or forecasting stock returns to generate alpha. This approach can be applied to emerging market equities to ultimately provide a smoother experience for investors. This alternative approach is volatility capture.
C-0317-1759 03-30-18
FOR INSTITUTIONAL INVESTOR USE
December 2015 Revised July 2016 intechinvestments.com
Emerging Markets and Volatility Capture: An Effective Combination At INTECH, we believe that conventional reliance on macroeconomic and fundamental analysis engenders forecasting risk and can be avoided. In constructing EME portfolios, INTECH takes an unbiased and scientific approach by attempting to effectively capture the volatility of stocks in order to generate a reliable excess return above the benchmark, over the long term. For investors looking to participate in the potentially higher growth rates of these developing countries, the application of volatility capture to portfolio management offers a compelling approach for accessing these investment opportunities. INTECH has been successfully implementing this volatilitycapture approach to portfolio construction for more than 25 years. Its first application, in 1987, was to the construction of U.S. large-cap equity portfolios; building on this experience, in 2005, INTECH began managing global large-cap portfolios. As of June 30, 2016, on a rolling three-year basis, INTECH’s U.S. equity portfolios have outperformed their respective benchmarks 75% of the time, gross of fees (64% net of fees), while the firm’s global and non-U.S. strategies have outperformed their benchmarks 94% of the time, gross of fees
(88% net of fees). Moreover, this approach to portfolio construction is very versatile: it can be applied to indices spanning a wide variety of different styles and geographic areas, which allows investors to customize their portfolios based on their individual risk budget. The process potentially results in a more efficient portfolio (i.e., higher returns with comparable or lower risk) than the capitalization-weighted index. The chart below demonstrates INTECH’s capabilities in this regard. After expanding its capabilities to include non-U.S. large-cap equities, EME represents a natural application of the firm’s mathematical investment process. Years of careful validation and testing have confirmed that INTECH’s risk-managed approach to portfolio construction has the potential to generate alpha over time by exploiting a basic and universal tenet of equity investing – buying low and selling high – to capture the fluctuations of EME through periodic rebalancing and without having to reimagine the underlying process. Because systematic rebalancing – the mechanism for volatility capture -- replenishes diversification, INTECH’s process also results in risk-managed strategies that have the potential to weather the inevitable market crises.
Figure 1: Above benchmark returns with lower risk * Gross of fees, as of June 30, 2016
Above Benchmark Returns with Lower Risk 6%
Annualized Excess Return
4% 2% 0% -2% -4% -6% -8% -50%
-40%
-30%
-20%
-10%
0%
10%
Reduction in Absolute Volatility See Composite Performance and Presentation Notes for additional information. *Figure 1: The blue diamonds represent annualized performance and risk (measured by standard deviation), since inception for each of INTECH’s strategies with a minimum track record of three years, relative to their respective benchmark. The black square represents the benchmark of each strategy, collectively.
Structural Advances Facilitate Expansion in EME The volatility of emerging market equities has historically been greater than that of developed market equities, making EME particularly attractive for the application of INTECH’s volatilitycapture approach to portfolio construction. Additionally, certain features of EME have become more stable during the past 15 years, enabling INTECH to make more accurate estimates of volatilities and correlations. During this period, a number of characteristics of emerging markets have been maturing, facilitating investing in companies domiciled in these areas of the world, including:
transparency,
regulatory infrastructure,
trade infrastructure (e.g., electronic execution), and
trading efficiency.
In parallel, global investors are increasingly turning their focus to these developing economies; this not only results in strong external capital flows, but also significant transfer of technical investment know-how, which helps reduce trading costs in the EME space. These structural changes have allowed INTECH to extend its investment process to EME, both in terms of stand-alone strategies, as well as segments of a global index (such as the MSCI All Country World Index, the Russell Global Defensive Index, or the FTSE Minimum Variance Index). Applying INTECH’s approach to portfolio management to EME helps to effectively mitigate some of the perennial risks associated with investing in these developing economies. For example, the idiosyncratic nature of EME (from diverse and inconsistent accounting standards to elevated levels of political risk) generally requires a large number of fundamental analysts or quantitative researchers to be dedicated to each country, resulting in significant challenges to applying traditional methods for ensuring consistency and global risk awareness. Moreover, the highly variable nature of each country’s economic and political environment, and the large number of countries, pose significant challenges to most investment managers as they attempt to preserve the relevance and accuracy of their alpha models. On the contrary, from INTECH’s perspective, the large number of sources of less-correlated risk implies a high level of confidence for both risk management (through careful diversification) and excess return (as higher
levels of compensated rebalancing are available). Even accounting for elevated trading costs, this ensures that the investment process can be applied in a systematic manner without the need for frequent overrides and adjustments as the market conditions change; this further results in more reliable simulations and disciplined implementation.
Volatility Capture Solutions in Emerging Markets Capturing volatility through systematic rebalancing provides the potential to generate a trading profit, is necessary for preserving diversification, and potentially achieves higher portfolio compound returns. This dynamic process can be applied to both relative- and absolute-risk emerging market strategies including core and enhanced index (relative-risk), and low and managed volatility (absolute-risk), all benchmarked to the MSCI Emerging Markets Index.
Conclusion For investors who are looking to participate in the potentially higher growth rates of emerging markets, the application of volatility capture to portfolio management is a compelling approach for accessing these investment opportunities. INTECH’s risk-managed process also provides a potentially smoother experience, helping to protect against the increased risks that come with investing in these growing economies. It is an approach that is well suited for ensuring that the profusion of options and uncertainties does not become a distraction, but instead a reliable means of diversification. This is particularly the case since a volatility-capture strategy tends to have low correlation with traditional active approaches and the two may often fit well together.
C om posite Perform ance Sum m ary As of June 3 0 , 2 0 1 6 Active Risk -M anaged U.S. Strategies U.S. Enhanced Plus Gross S&P 500 Index Difference (Gross-Index) U.S. Enhanced Plus Net U.S. Large C ap Grow th Gross S&P 500 Growth Index* Difference (Gross-Index) U.S. Large Cap Growth Net U.S. Enhanced Index Gross S&P 500 Index Difference (Gross-Index) U.S. Enhanced Index Net U.S. Broad Large C ap Grow th Gross Russell 1000 Growth Index Difference (Gross-Index) U.S. Broad Large Cap Growth Net U.S. Broad Enhanced Plus Gross Russell 1000 Index Difference (Gross-Index) U.S. Broad Enhanced Plus Net U.S. Large C ap C ore Gross S&P 500 Index Difference (Gross-Index) U.S. Large Cap Core Net U.S. Broad Large C ap Value Gross Russell 1000 Value Index Difference (Gross-Index) U.S. Broad Large Cap Value Net U.S. Broad Enhanced Index Gross Russell 1000 Index Difference (Gross-Index) U.S. Broad Enhanced Index Net Enhanced Index N orth Am erica Gross MSCI North America Index Difference (Gross-Index) Enhanced Index North America Net Large C ap C ore USA Gross MSCI USA Index Difference (Gross-Index) Large Cap Core USA Net Global/N on-U.S. Strategies Global Large C ap C ore Gross MSCI World Index Difference (Gross-Index) Global Large Cap Core Net International Large C ap C ore Gross MSCI EAFE Index Difference (Gross-Index) International Large Cap Core Net Global Large C ap C ore ex Japan (Kok usai) Gross MSCI Kokusai (World ex Japan) Index Difference (Gross-Index) Global Large Cap Core ex Japan (Kokusai) Net European Large C ap C ore (EUR) Gross MSCI Europe Index (EUR) Difference (Gross-Index) European Large Cap Core (EUR) Net Global All C ountry Enhanced Index Gross MSCI All Country World Index Difference (Gross-Index) Global All Country Enhanced Index Net Global All C ountry C ore Gross MSCI All Country World Index Difference (Gross-Index) Global All Country Core Net Global All C ountry C ore Select Gross MSCI All Country World Index Difference (Gross-Index) Global All Country Core Select Net Em erging M ark ets C ore Gross MSCI Emerging Markets Index Difference (Gross-Index) Emerging Markets Core Net
QTD 2.73% 2.46% 0 .2 8 % 2.66% 1.32% 1.01% 0 .3 1 % 1.19% 2.34% 2.46% -0 .1 1 % 2.26% 3.09% 0.61% 2 .4 8 % 2.97% 3.07% 2.54% 0 .5 3 % 2.99% 3.45% 2.46% 0 .9 9 % 3.32% 4.63% 4.58% 0 .0 4 % 4.53% 2.39% 2.54% -0 .1 4 % 2.34% 2.37% 2.65% -0 .2 8 % 2.30% 3.39% 2.60% 0 .7 9 % 3.27%
Y TD 3.39% 3.84% -0 .4 5 % 3.24% 2.64% 1.55% 1 .0 9 % 2.39% 3.59% 3.84% -0 .2 5 % 3.43% 5.41% 1.36% 4 .0 5 % 5.15% 3.88% 3.74% 0 .1 4 % 3.73% 5.09% 3.84% 1 .2 5 % 4.83% 6.42% 6.30% 0 .1 2 % 6.22% 2.82% 3.74% -0 .9 3 % 2.70% 3.39% 4.17% -0 .7 8 % 3.25% 4.51% 3.58% 0 .9 3 % 4.26%
1 Yr 4.58% 3.99% 0 .5 9 % 4.29% 4.83% 4.24% 0 .5 9 % 4.32% 4.40% 3.99% 0 .4 0 % 4.08% 6.30% 3.02% 3 .2 8 % 5.78% 3.86% 2.94% 0 .9 2 % 3.56% 7.19% 3.99% 3 .1 9 % 6.65% 3.79% 2.86% 0 .9 3 % 3.40% 2.17% 2.94% -0 .7 7 % 1.94% 2.08% 2.68% -0 .6 0 % 1.80% 4.01% 3.18% 0 .8 3 % 3.52%
3 Y rs 13.00% 11.66% 1 .3 4 % 12.68% 12.40% 13.41% -1 .0 2 % 11.86% 11.31% 11.66% -0 .3 5 % 10.98% 14.53% 13.07% 1 .4 6 % 13.97% 12.39% 11.48% 0 .9 2 % 12.06% 13.59% 11.66% 1 .9 4 % 13.04% 9.70% 9.87% -0 .1 6 % 9.30% 10.77% 11.48% -0 .7 1 % 10.53% 10.30% 10.83% -0 .5 3 % 10.00% 11.74% 11.54% 0 .2 0 % 11.25%
5 Y rs 12.65% 12.10% 0 .5 5 % 12.32% 11.45% 12.92% -1 .4 7 % 10.92% 11.85% 12.10% -0 .2 5 % 11.51% 12.91% 12.35% 0 .5 6 % 12.35% 12.30% 11.88% 0 .4 1 % 11.95% 12.83% 12.10% 0 .7 3 % 12.28% 11.81% 11.35% 0 .4 5 % 11.39% 11.43% 11.88% -0 .4 6 % 11.18%
1.66% 1.21% 0 .4 5 % 1.55% -1.24% -1.19% -0 .0 5 % -1.34% 1.41% 1.23% 0 .1 8 % 1.31% -0.74% 0.22% -0 .9 7 % -0.87% 1.99% 1.19% 0 .8 1 % 1.90% 1.47% 1.19% 0 .2 8 % 1.33% 1.42% 1.19% 0 .2 3 % 1.26% 0.69% 0.80% -0 .1 1 % 0.49%
1.48% 1.02% 0 .4 7 % 1.26% -3.89% -4.04% 0 .1 5 % -4.09% 1.55% 1.65% -0 .1 1 % 1.34% -8.17% -6.73% -1 .4 4 % -8.40% 1.91% 1.58% 0 .3 3 % 1.73% 1.75% 1.58% 0 .1 7 % 1.48% 1.94% 1.58% 0 .3 6 % 1.61% 3.64% 6.60% -2 .9 6 % 3.22%
-0.03% -2.19% 2 .1 7 % -0.47% -5.67% -9.72% 4 .0 5 % -6.07% 0.18% -1.56% 1 .7 4 % -0.23% -6.52% -10.41% 3 .8 9 % -6.98% -1.44% -3.17% 1 .7 3 % -1.78% -1.76% -3.17% 1 .4 0 % -2.28% -0.63% -3.17% 2 .5 4 % -1.27% -12.42% -11.72% -0 .7 0 % -13.11%
9.27% 7.54% 1 .7 3 % 8.78% 5.11% 2.52% 2 .5 9 % 4.67% 9.48% 7.99% 1 .4 9 % 9.00% 11.39% 8.03% 3 .3 6 % 10.82% 7.36% 6.60% 0 .7 6 % 6.98% 7.82% 6.60% 1 .2 2 % 7.23% 8.42% 6.60% 1 .8 2 % 7.70% -1.03% -1.21% 0 .1 8 % -1.82%
8.63% 7.23% 1 .3 9 % 8.13% 4.42% 2.14% 2 .2 8 % 3.99% 8.69% 7.50% 1 .1 9 % 8.17% 10.47% 7.18% 3 .2 9 % 9.89%
7 Y rs 15.68% 14.92% 0 .7 6 % 15.34% 14.88% 15.61% -0 .7 3 % 14.34% 14.95% 14.92% 0 .0 3 % 14.59% 16.73% 15.52% 1 .2 1 % 16.15% 15.75% 15.03% 0 .7 1 % 15.39% 15.83% 14.92% 0 .9 1 % 15.27% 15.26% 14.50% 0 .7 6 % 14.83% 14.83% 15.03% -0 .2 1 % 14.55%
12.33% 10.88% 1 .4 5 % 11.80% 8.55% 6.45% 2 .1 1 % 8.10% 12.81% 11.51% 1 .3 0 % 12.25%
Annualiz ed Returns 1 0 Y rs 8.03% 7.42% 0 .6 1 % 7.71% 8.20% 8.97% -0 .7 8 % 7.69% 7.65% 7.42% 0 .2 2 % 7.31% 8.60% 8.78% -0 .1 8 % 8.06% 7.86% 7.51% 0 .3 6 % 7.54% 7.94% 7.42% 0 .5 1 % 7.42% 6.98% 6.13% 0 .8 5 % 6.58%
6.54% 5.02% 1 .5 2 % 6.02%
1 5 Y rs 7.19% 5.75% 1 .4 4 % 6.85% 7.76% 6.06% 1 .7 0 % 7.24% 6.40% 5.75% 0 .6 5 % 6.06% 6.53% 5.50% 1 .0 2 % 5.98% 7.12% 6.02% 1 .1 0 % 6.79%
2 0 Y rs 9.44% 7.87% 1 .5 7 % 9.07% 11.32% 7.96% 3 .3 6 % 10.77%
ITD 10.70% 9.32% 1 .3 8 % 10.31% 12.32% 9.27% 3 .0 5 % 11.75% 6.43% 5.55% 0 .8 8 % 6.09% 5.16% 2.97% 2 .1 9 % 4.62% 7.56% 6.35% 1 .2 1 % 7.22% 7.67% 5.86% 1 .8 2 % 7.17% 8.37% 7.44% 0 .9 3 % 7.97% 10.09% 10.42% -0 .3 2 % 9.82% 12.58% 12.91% -0 .3 3 % 12.27% 13.99% 13.68% 0 .3 1 % 13.50% 7.56% 5.79% 1 .7 7 % 7.02% 3.86% 1.31% 2 .5 5 % 3.42% 13.52% 12.48% 1 .0 5 % 12.96% 11.69% 7.53% 4 .1 6 % 11.09% 9.22% 8.42% 0 .8 0 % 8.84% 5.93% 5.20% 0 .7 3 % 5.36% 6.85% 5.41% 1 .4 4 % 6.14% -3.30% -3.25% -0 .0 6 % -4.07%
Inception Date 7/1/1987
7/1/1993
4/1/1998
11/1/2000
4/1/2001
8/1/2001
8/1/2004
10/1/2008
7/1/2012
8/1/2012
1/1/2005
11/1/2006
5/1/2009
1/1/2010
11/1/2011
5/1/2013
6/1/2013
6/1/2013
* S&P 500 Growth Index represents the S&P 500/Barra methodology from inception to 2005, S&P 500/Citigroup Growth Index methodology from 2006 through 12/8/09 and S&P 500 Growth Index methodology thereafter. Differences may not agree with input data due to rounding.
C om posite Perform ance Sum m ary (cont'd) As of June 3 0 , 2 0 1 6 Active Risk -M anaged Absolute-Risk Strategies* Global Low Volatility Gross MSCI World Index Difference (Gross-Index) Global Low Volatility Net U.S. Low Volatility Gross Russell 1000 Index Difference (Gross-Index) U.S. Low Volatility Net Euroz one Low Volatility (EUR) Gross MSCI EMU Index (EUR) Difference (Gross-Index) Eurozone Low Volatility (EUR) Net Em erging M ark ets M anaged Volatility Gross MSCI Emerging Markets Index Difference (Gross-Index) Emerging Markets Managed Volatility Net Em erging M ark ets Low Volatility Gross MSCI Emerging Markets Index Difference (Gross-Index) Emerging Markets Low Volatility Net U.S. M anaged Volatility Gross Russell 1000 Index Difference (Gross-Index) U.S. Managed Volatility Net
QTD 3.50% 1.21% 2 .2 9 % 3.41% 5.18% 2.54% 2 .6 4 % 5.09% -3.78% -2.23% -1 .5 5 % -3.86% 0.31% 0.80% -0 .4 9 % 0.11% 0.91% 0.80% 0 .1 1 % 0.77% 3.61% 2.54% 1 .0 7 % 3.46%
Y TD 9.74% 1.02% 8 .7 2 % 9.55% 12.46% 3.74% 8 .7 2 % 12.28% -7.56% -8.67% 1 .1 1 % -7.72% 3.75% 6.60% -2 .8 5 % 3.33% 4.47% 6.60% -2 .1 3 % 4.18% 7.24% 3.74% 3 .5 0 % 6.95%
1 Yr 11.73% -2.19% 1 3 .9 3 % 11.34% 16.90% 2.94% 1 3 .9 7 % 16.53% -8.34% -11.01% 2 .6 7 % -8.66% -9.22% -11.72% 2 .4 9 % -9.94% -7.98% -11.72% 3 .7 4 % -8.48% 9.87% 2.94% 6 .9 4 % 9.27%
3 Y rs 11.93% 7.54% 4 .3 9 % 11.54% 14.88% 11.48% 3 .4 0 % 14.51% 8.36% 8.45% -0 .0 9 % 7.98% -1.01% -1.21% 0 .2 0 % -1.80% -2.11% -1.21% -0 .9 0 % -2.64% 14.77% 11.48% 3 .2 9 % 14.14%
5 Y rs
7 Y rs
Annualiz ed Returns 1 0 Y rs 1 5 Y rs
2 0 Y rs
ITD 13.34% 10.65% 2 .6 9 % 12.95% 15.70% 13.81% 1 .8 9 % 15.32% 8.97% 10.72% -1 .7 4 % 8.59% -1.89% -3.61% 1 .7 2 % -2.67% -3.13% -3.25% 0 .1 2 % -3.66% 13.65% 10.66% 2 .9 9 % 13.03%
Inception Date 1/1/2012
8/1/2012
8/1/2012
4/1/2013
6/1/2013
6/1/2013
* INTECH’s absolute-risk strategies are engineered to reduce the portfolio’s absolute standard deviation for a given target excess return rather than its tracking error relative to a cap-weighted benchmark. Difference may not agree with input data due to rounding.
Presentation Notes INTECH Investment Management LLC (“INTECH”) is a specialized global asset manager registered under the Investment Advisers Act of 1940 that applies advanced mathematics and systematic portfolio rebalancing to exploit a unique and reliable source of excess returns and risk control – stock price volatility. INTECH is a subsidiary of Janus Henderson Group plc (NYSE: JHG) and is affiliated with its subsidiaries and affiliates. Past performance cannot guarantee future results. Investing involves risk, including the possible loss of principal and fluctuation of value. In addition, the proprietary mathematical investment process used by INTECH may not achieve the desired results. Performance results reflect the reinvestment of dividends and other earnings. Portfolio performance results shown are time-weighted rates of return using daily valuation, include the effect of transaction costs (commissions, exchange fees, etc.), and are gross of non-reclaimable withholding taxes, if any. The composite includes all actual fee-paying accounts managed on a fully discretionary basis according to the investment strategy from inception date, including those no longer under management. Accounts meeting such criteria enter the composite upon the full first month under management. For periods of less than one year, performance is not annualized. Reporting currency is USD unless otherwise noted. INTECH claims compliance with the Global Investment Performance Standards (GIPS®). To receive a complete list of composite descriptions and/or presentations that adhere to the GIPS standards, please contact INTECH at
[email protected]. The gross performance results presented do not reflect the deduction of investment advisory fees. Returns will be reduced by such advisory fees and other contractual expenses as described in each client’s individual contract. The net performance results presented reflect the deduction of model investment advisory fees, and not the advisory fees actually charged to the accounts in the composite. Prior to December 31, 2004, the model advisory fees deducted reflect the maximum fixed fee in effect for each strategy. Beginning January 1, 2005, the model advisory fees deducted reflect the standard fee schedule in effect during the period shown, applied to each account in the composite on a monthly basis. Standard fee schedules are available upon request. Actual advisory fees paid may vary among clients invested in the same strategy, which may be higher or lower than the model advisory fees. Some accounts may utilize a performance-based fee. U.S. Enhanced Plus Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization securities. The benchmark is the S&P 500 Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 2-2.25%. The composite was created in January 1993. U.S. Large Cap Growth Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization growth securities. The benchmark is the S&P 500 Growth Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 4-5%. From January 1997 through June 2001, the composite contained one non-fee paying account managed for the then parent company. The composite was created in July 1993. U.S. Enhanced Index Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization securities. The benchmark is the S&P 500 Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 1.35-1.5%. The composite was created in April 1998. U.S. Broad Large Cap Growth Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization growth securities. The benchmark is the Russell 1000 Growth Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 4-5%. The composite was created in November 2000. U.S. Broad Enhanced Plus Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization securities. The benchmark is the Russell 1000 Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 2-2.25%. The composite was created in April 2001. U.S. Large Cap Core Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization securities. The benchmark is the S&P 500 Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 4-5%. From January 1997 through June 2001, the composite contained one non-fee paying account managed for the then parent company. The composite was created in January 1993. U.S. Broad Large Cap Value Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization value securities. The benchmark is the Russell 1000 Value Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 1.8-2.3%. The composite was created in August 2004. U.S. Broad Enhanced Index Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization securities. The benchmark is the Russell 1000 Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 1.35-1.5%. The composite was created in March 2006. Large Cap Core USA Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization securities. The benchmark is the MSCI USA Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 3-3.75%. The composite was created in July 2012. Global Large Cap Core Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of global large capitalization securities. The benchmark is the MSCI World Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 2.5-3.5%. The composite was created in January 2005. International Large Cap Core Composite includes all fully discretionary separately managed and registered pooled portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of non-U.S. large capitalization securities. The benchmark is the MSCI EAFE Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 3-4.5%. The composite was created in November 2006. Global Large Cap Core ex Japan (Kokusai) Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of global large capitalization securities. The benchmark is the MSCI World ex Japan Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 3-3.75%. The composite was created in May 2009. European Large Cap Core Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of European large capitalization securities. The benchmark is the MSCI Europe Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 3-4%. The composite was created in January 2010.
Presentation Notes (cont’d) Global All Country Enhanced Index Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of global large capitalization securities. The benchmark is the MSCI All Country World Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 1-1.5%. The composite was created in November 2011. Global All Country Core Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of global large capitalization securities. The benchmark is the MSCI All Country World Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 2.25-3.25%. The composite was created in June 2013. Global All Country Core Select Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of global large capitalization securities. The benchmark is the MSCI All Country World Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 3-4%. The composite was created in June 2013. Emerging Markets Core Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of emerging markets large capitalization securities. The benchmark is the MSCI Emerging Markets Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 3-4%. The composite was created in June 2013. Global All Country Core ex U.S. composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of global large capitalization securities. The benchmark is the MSCI All Country World ex USA Index. The objective is to outperform the benchmark over the full market cycle, with an expected tracking error of 2.25-3.25%. The composite was created in July 2014. Global Low Volatility Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of global large capitalization securities. The benchmark is the MSCI World Index. The objective is market-like returns as compared to the benchmark over the full market cycle, with a total volatility (standard deviation) considerably below that of the benchmark. The composite was created in February 2012. U.S. Low Volatility Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization securities. The benchmark is the Russell 1000 Index. The objective is market-like returns as compared to the benchmark over the full market cycle, with a total volatility (standard deviation) considerably below that of the benchmark. The composite was created in August 2012. Eurozone Low Volatility (EUR) Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of European large capitalization securities. The benchmark is the MSCI EMU Index. The objective is market-like returns as compared to the benchmark over the full market cycle, with a total volatility (standard deviation) considerably below that of the benchmark. The composite was created in August 2012. Emerging Markets Managed Volatility Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of emerging markets large capitalization securities. The benchmark is the MSCI Emerging Markets Index. The objective is to outperform the benchmark over the full market cycle, with a total volatility (standard deviation) below that of the index. The composite was created in May 2013. Emerging Markets Low Volatility Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of emerging markets large capitalization securities. The benchmark is the MSCI Emerging Markets Index. The objective is market-like returns as compared to the benchmark over the full market cycle, with a total volatility (standard deviation) considerably below that of the benchmark. The composite was created in June 2013. U.S. Managed Volatility Composite includes all fully discretionary separately managed portfolios invested in this strategy. The strategy pursues a risk-managed approach to construct a diversified portfolio of U.S. large capitalization securities. The benchmark is the Russell 1000 Index. The objective is to outperform the benchmark over the full market cycle, with a total volatility (standard deviation) below that of the index. The composite was created in June 2013. The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. For U.S. Large Cap Growth from inception to 12/31/05, the composite’s benchmark was the S&P 500/Barra Growth Index (“Barra Growth Index”). In 2005, S&P announced index name and methodology changes affecting the Barra Growth Index, which later became the S&P 500/Citigroup Growth Index (“Citigroup Growth Index”). During the transitional period, from 1/1/06 to 3/31/06, the benchmark return consisted partially of the return of the Barra Growth Index and the Citigroup Growth Index. On 4/1/06 the composite’s benchmark was changed to the Citigroup Growth Index. Effective 12/9/2009, the Citigroup Growth Index’s name was changed to S&P 500 Growth Index. The S&P 500 Growth Index is a market-capitalization-weighted index developed by Standard and Poor’s consisting of those stocks within the S&P 500 Index that exhibit strong growth characteristics. The index measures the performance of the growth style of investing in large cap U.S. stocks. The S&P 500 Growth Index uses a numerical ranking system based on growth factors and value factors to determine the constituents and their weightings. The S&P 500 Index will be reconstituted annually. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Index measures performance of the 1,000 largest companies in the Russell 3000 Index. The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The MSCI USA Index is a free float-adjusted market capitalization-weighted index that covers approximately 85% of large cap and mid cap investable securities in the U.S. equity markets. The MSCI North America Index is a free float-adjusted market capitalization-weighted index that is designed to measure the performance of the developed equity markets in Canada and the United States. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure global developed market equity performance. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI World ex Japan (Kokusai) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets excluding Japan. The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI All Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure performance of global developed and emerging equity markets. The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index that is designed to measure performance of emerging equity markets. The MSCI EMU (European Economic and Monetary Union) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of countries within EMU. The Index returns are provided to represent the investment environment existing during the time periods shown and are not covered by the report of independent verifiers. For comparison purposes, the index is fully invested, which includes the reinvestment of dividends and capital gains. The returns for the index do not include any transactions costs, management fees or other costs, and are gross of dividend tax withholdings unless otherwise noted. Composition of each separately managed account portfolio may differ from securities in the corresponding benchmark index. The index is used as a performance benchmark only, as INTECH does not attempt to replicate an index. The weightings of securities within the portfolio may differ significantly from the weighting within the index. The index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the active management of an actual portfolio. Prior to May 21, 2010, with respect to non-U.S. securities traded on non-U.S. exchanges, INTECH used fair value prices that reflected current market conditions at the end of regular trading hours of the NYSE, normally 4:00 PM ET, rather than unadjusted closing prices in local markets. Therefore, the prices as well as foreign exchange rates used to calculate the U.S. dollar market values of securities may have differed from those used by an index. Indices generally use the unadjusted closing price in local markets instead of fair value pricing. As of May 21, 2010, prices for non-U.S. securities traded on non-U.S. exchanges are typically valued as of the close of their respective local markets. However, if a significant event takes place between the close of the local market and the close of the U.S. domestic market, a security may be fair valued. Non U.S. securities are translated into U.S. dollars using the 4:00 P.M. London spot rate. With respect to the European Large Cap Core Composite, prices assigned to investments are published prices on their primary markets or exchanges since the composite’s inception. Investments are subject to certain risks, including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. These risks are magnified for portfolios that include emerging markets. S&P 500 Dow Jones Indices LLC and/or its affiliates make no express or implied warranties or representations and shall have no liability whatsoever with respect to any S&P data contained herein, if shown. The S&P data has been licensed for use by INTECH and may not be further redistributed or used as a basis for other indices or any securities or financial products. This report has not been approved, reviewed, or produced by S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC's indices, please visit www.spdji.com. Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto, if shown. The presentation may contain confidential information and unauthorized use, disclosures, copying, dissemination or redistribution is strictly prohibited. This is a presentation of INTECH. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in INTECH’s presentation thereof. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein, if shown. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report has not been approved, reviewed, or produced by MSCI.
