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INTERNATIONAL INVESTMENT PROCESS
April 14, 2016
RIVERFRONT INTERNATIONAL INVESTING PROCESS
RiverFront Investment Group (RiverFront) is an SEC-registered investment advisor and global
asset manager who combines a strategic and tactical investment approach with uncommon
transparency. RiverFront’s employees maintain majority ownership, and the portfolio team
responsible for our international investment process averages 20 years of experience in the
investment industry.
The investment cornerstones and processes we adhere to have been molded out of our
experience in managing global portfolios since 2003. We believe they incorporate effective
analysis tools available and provide an adequate level of flexibility in recognition that the
investment landscape is always changing. The international investment process for our portfolios
can be divided into 2 distinct steps: 1) investment selection and, 2) currency hedging.
INVESTMENT SELECTION: CORNERSTONES
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ACCESSING A BROAD RANGE OF INTERNATIONAL OPPORTUNITIES: We believe the
typical US investor seeking international exposure would prefer a broad, flexible allocation.
Thus, we have the mandate to allocate dynamically across multiple geographies.
VALUE AND MOMENTUM FACTORS: RiverFront’s factor-driven analysis has found
particular efficacy in the combination of value, fundamental momentum, and price
momentum factors. These findings inform our overall investment philosophy and process.
QUANTITATIVE AND QUALITATIVE METHODOLOGIES: We believe that a quantitative
methodology is an essential foundation for investing because it tends to be non-emotional
and probabilistic; equally, we believe that qualitative analysis based on deep expertise can
provide valuable insight in times when historical analysis is less relevant.
RISK CONTROL AND RETURN POTENTIAL: It is our belief that risk-adjusted returns in
international investing reside in identifying positive geographic and/or macro factors, versus
company-specific ones. We believe broadly diversified portfolios of international equities
are optimal implementation instruments.
INVESTMENT SELECTION: PROCESS
RiverFront’s international selection process is designed to combine a variety of disciplines into a
single analytical framework.
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FORMATION OF INVESTABLE UNIVERSE: A top-down analysis that includes liquidity,
data availability and reliability narrows the investable universe down to approximately 50
countries and regional geographic markets.
FLEXIBLE MATRIX SCREENING: Our team runs a quantitative tactical matrix screen
that scores geographies on fundamental momentum, technical momentum, and
valuation for both equity markets and currencies. These scores are weighted by those
factors which demonstrate positive and durable efficacy throughout history, in our view.
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INTERNATIONAL INVESTMENT PROCESS
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VALUATION ANALYSIS: RiverFront's international equity team utilizes various valuation
models to gauge relative and absolute value. For specific countries, we analyze several
valuation metrics on both a time-series (relative to the country's historical range) and
cross-sectional basis (relative to other countries).
QUALITATIVE ASSESSMENT: We produce a deep proprietary top-down country or
regional analysis that attempts to place ratings on the following: macroeconomic
conditions, currency analysis, central bank policy, geopolitical and/or unique factors, and
key drivers.
INVESTMENT SELECTION: The results of our matrix screening, qualitative
assessments and valuation analysis identify biases and/or themes we want to express in
our portfolios. Our portfolio managers utilize modeling tools to construct a portfolio that
incorporates these biases and themes using a combination of equity vehicles (ETFs,
stocks, ADR’s/GDR’s, REITs, etc.). Our ETF portfolios will use exchange traded funds
(ETFs) exclusively. For more information on RiverFront’s products and services please
refer to www.riverfrontig.com.
CURRENCY HEDGING: WHY DYNAMICALLY CURRENCY HEDGE
The total return of a foreign stock consists of its equity return plus the foreign currency return.
Currency hedging seeks to negate the possible negative return contribution that fluctuating
currency exchange rates may cause in an unhedged portfolio. For US investors, currency
hedging is most beneficial in an environment where the US dollar (USD) is strengthening
relative to the foreign currency in which an underlying investment is denominated.
CURRENCY MOVEMENTS CAN HAVE A SIGNIFICANT IMPACT ON PORTFOLIO
RETURNS: When an American investor buys a foreign financial instrument (stock or
bond), those instruments will generally be denominated in a foreign currency, and an
exchange rate will be applied at the time of purchase. Ultimately, when that investment
is sold and the proceeds are converted back into US dollars, a different exchange rate
will likely be applied. Differences in the exchange rate at the time of purchase and the
exchange rate at the time of sale will add to or subtract from the returns of
that investment.
2. US INVESTORS CARE ABOUT US DOLLAR RETURNS: Currency hedging is an
important consideration when investing internationally, since the liabilities of the typical
American, like college or retirement, are denominated in dollars. For this reason,
fluctuating exchange rates introduce an additional level of risk and volatility to
international investments.
3. TODAY’S ENVIRONMENT MAKES HEDGING ESPECIALLY IMPORTANT: The
power and influence of central banks around the world has grown in the aftermath of the
financial crisis of 2008. Central bankers are now being asked to play a greater role in
ensuring economic stability in their countries and/or regions and, in our opinion, have
been given additional monetary tools to accomplish that mission. As a result, we expect
exchange rates to fluctuate more often and in greater magnitude than they have in
the past.
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INTERNATIONAL INVESTMENT PROCESS
CURRENCY HEDGING: CORNERSTONES
RiverFront employs a dynamic hedging process as part of our international investing process.
1. BROAD MANDATE
• Dynamic Hedge Ratio: RiverFront can dynamically hedge from as little as 0% or
as much as 100% of the portfolio’s international securities.
• Potential to Hedge Multiple Currencies: RiverFront can hedge a single
currency or multiple currencies represented within the portfolio, and each
currency can be hedged in varying proportions. This ability has become
increasingly important as central bank monetary policies vary across regions and
countries. It is important to note, however, that within our SMA and UMA/MDP
accounts RiverFront will often use third-party ETFs to execute currency hedges.
In our ETF only portfolios, we will use ETFs exclusively. In using third-party
ETFs, the portfolio managers are limited in their ability to execute their dynamic
hedging strategy by the ETF products that are currently on the market.
2. QUANTITATIVE AND QUALITATIVE TOOLS
• Quantitative: Over the long term, currency performance is often influenced
by quantitative factors such as price momentum of the currency, interest rate
differentials, central bank balance sheet size, and rate of growth. Quantitative
assessments of the overall macroeconomic health of a country or region may
also influence currency movements.
• Qualitative: Over the short term, a currency's value can be dictated by forces
that can only be assessed through qualitative techniques, such as forwardlooking forecasts of central bank action. These assessments require a nuanced
understanding of the various personalities, motivations, and explicit statements of
the decision-makers within the central bank. Qualitative factors can often have a
significant impact on the value of a currency before quantitative factors signal a
potential change.
3. FLEXIBLE IMPLEMENTATION
• Changes Can Happen at Any Time: Investment events and central bank policy
shifts can occur any time. As such, our portfolios and currency hedging are not
constrained to a fixed rebalance window.
BOTTOM LINE: The investment cornerstones and processes we adhere to have been molded
out of our experience in managing global portfolios since 2003. We believe they incorporate
effective analysis tools and provide an adequate level of flexibility in recognition that the
investment landscape is always changing.
Important Disclosure and Principle Risk Information:
Past performance is no guarantee of future results.
Using a currency hedge or a currency hedged product does not insulate the portfolio against losses. RiverFront portfolios that
invest in non-U.S. securities may employ a dynamic currency hedging strategy. Because of this, these portfolios may have lower
returns than an equivalent non-currency hedged investment when the component currencies are rising relative to the U.S.
dollar. As such, contracts to sell foreign currency will generally be expected to limit any potential gain that might be realized
by the portfolio if the value of the hedged currency increases. In addition, although the portfolios seek to minimize the impact
of currency fluctuations on returns, the use of currency hedging will not necessarily eliminate exposure to all currency
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fluctuations. Hedging against a decline in the value of a currency does not eliminate fluctuations in the value of a portfolio
security traded in that currency or prevent a loss if the value of the security declines. Additionally, currency hedging at the
wrong time, will lead to a lower overall return for an investor; as such, it is important that investors take time to understand
these and other risks associated with currency hedging. It may not be possible for the portfolios to hedge against a devaluation
that is so generally anticipated that RiverFront is not able to contract to sell the currency at a price above the devaluation
level it anticipates.
Investing in foreign companies poses additional risks since political and economic events unique to a country or region may
affect those markets and their issuers. In addition to such general international risks, the portfolio may also be exposed to
currency fluctuation risks and emerging markets risks as described further below.
Changes in the value of foreign currencies compared to the U.S. dollar may affect (positively or negatively) the value of the
portfolio’s investments. Such currency movements may occur separately from, and/or in response to, events that do not
otherwise affect the value of the security in the issuer’s home country. Also, the value of the portfolio may be influenced by
currency exchange control regulations. The currencies of emerging market countries may experience significant declines against
the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the portfolio.
Foreign investments, especially investments in emerging markets, can be riskier and more volatile than investments in the U.S.
and are considered speculative and subject to heightened risks in addition to the general risks of investing in non-U.S.
securities.
Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and
securities markets of certain emerging market countries.
There are special risks associated with an investment in real estate and Real Estate Investment Trusts (REITs), including credit
risk, interest rate fluctuations and the impact of varied economic conditions.
Exchange-traded funds (ETFs) are sold by prospectus. Please consider the investment objectives, risk, charges and
expenses carefully before investing. The prospectus and summary prospectus, which contains this and other information,
can be obtained by calling your financial advisor. Read it carefully before you invest. As a portfolio manager and a
fiduciary for our clients, RiverFront will consider the investment objectives, risks, charges and expenses of a fund
carefully before investing our clients’ assets.
ETFs are subject to substantially the same risks as those associated with the direct ownership of the securities comprising the
index on which the ETF is based. Additionally, the value of the investment will fluctuate in response to the performance of the
underlying index. ETFs typically incur fees that are separate from those fees charged by RiverFront. Therefore, investments in
ETFs will result in the layering of expenses.
RiverFront Investment Group, LLC, is an investment advisor registered with the Securities Exchange Commission under the
Investment Advisors Act of 1940. The company manages a variety of portfolios utilizing stocks, bonds, and exchange-traded
funds (ETFs). Opinions expressed are current as of the date shown and are subject to change. They are not intended as
investment recommendations.
Any discussion of the individual securities that comprise the portfolios is provided for informational purposes only and should
not be deemed as a recommendation to buy or sell any individual security mentioned.
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