summarize this: To combat risk exposure, Phocas uses a model portfolio process, thus, barring client restrictions, all portfolios will mirror the model in terms of individual holdings and weights. Phocas also constructs diversified portfolios of approximately 90 to 120 positions, with a maximum single stock position of 3% of total portfolio value maintained, although it typically does not exceed 2%. These position weights are further reviewed by the investment team daily. While we don’t specifically target tracking error, we are always aware of our portfolio sector weights relative to that of the underlying index. Also, our discipline to keep sector weights close to those of the benchmark will also tend to muffle tracking error. Risk is also controlled through our intimate knowledge of each investment.
Individual sector weightings are determined relative to sector weightings in the benchmark, which we attempt to mimic so that the product’s alpha stems almost entirely from security selection. Sector exposures are limited to a range of +/- 3% the benchmark exposure except for the Financials sector which is limited to a range of +/- 6%. Relative sector weightings may vary depending on valuations and fundamental analysis of the companies in those industry groups.
Lastly, adherence to client guidelines is automated and restricted through our portfolio order management system, Eze OMS. We do not, however, use any externally developed risk measurement models in the portfolio management process. Rather, we monitor the portfolio across a wide variety of risk factors and have found our portfolio diversification limits – including individual stock limits – to control the risk in the portfolio effectively.