Fund is managed without human emotion

If you called Daniel Sido's approach to money management robotic, he probably wouldn't mind. As manager of the $288 million Phoenix Insight Value Equity Fund (HIEZX), he has designed his fund's research and portfolio management process so that it is completely devoid of human emotion. "Humans have a tendency to fall back on emotions," Mr. Sido explained in a way that conjures up images of Dr. Phil as a money manager. "We are looking to remove the emotions that can creep into the investment process." In order to achieve cool rationality, Mr. Sido and his team of five quantitative and six fundamental analysts apply a research process that begins with a quantitative strategy and then applies fundamental research to double-check the results. "We're using a behavioral-finance philosophy that dates back to the 1970s," he said. "When our quantitative process recommends a company, we want our fundamental analysts to raise issues related to things like valuations, earnings and investor interest." The fund is managed on a subadvisory basis by Harris Investment Management Inc. in Chicago, where Mr. Sido is a senior partner responsible for a $2 billion large-cap-value portfolio that is managed in sync with the Phoenix fund. Harris has $18 billion under management, including $7 billion in equities, and $11 billion in cash and bond portfolios. The fund, which was launched in 1996, has been under Mr. Sido's watch since 2001, the same year the portfolio's primary benchmark was shifted from the Standard & Poor's 500 stock index to the Russell 1000 Value Index to reflect the value orientation of the strategy better. The start of 2008 has not been kind to the fund, but that hasn't rattled him. Mr. Sido is determined not to stray from his strategy, which has earned the fund a four-star rating from Morningstar Inc. in Chicago. Through Thursday, the fund had fallen 3% this year, which compares with a 4.3% average decline for the large-cap-value category as tracked by Morningstar. The S&P 500, meanwhile, had declined by 5%. In each of the past four years, the fund has gained between 10% and 18%. "It has been a challenging first quarter for us," Mr. Sido said. "But last year, being overweight materials and underweight financials led to strong 2007 performance." Straying from the benchmark weightings is not part of the strategy but a result of the bottom-up research process. However, Mr. Sido explained, there is a concerted effort to keep the portfolio's sector weightings in line with the benchmark. As an example of this, consider that the fund's biggest deviation from the benchmark is a 3.5-percentage-point underweighting of the benchmark's 28.7% exposure to financial- sector stocks. To a lesser degree, the fund is also underweight consumer discretionary stocks. "We don't want concentrated bets relative to the benchmark," Mr. Sido said. "We're looking for better returns than the benchmark, but with lower risk." The research process begins with the companies making up the Russell 1000 Value Index plus another 100 or so American depository receipts. That universe is boiled down to around 900 names through an initial quantitative analysis of various stock price valuation measures and ratings. Liquidity is also a consideration at this level. Because the strategy is applied across a $2 billion portfolio, Mr. Sido will not make initial investments in any company with a market capitalization of less than $2.5 billion. The fund's weighted average market cap is $87 billion, which compares with the benchmark's $107 billion. The quantitative analysis continues by looking for improving fundamentals in areas such as price-to- earnings and price-to-sales ratios, as well as at the strength and direction of individual stock price movements. "At this stage in the research, we're looking for stocks on sale, but with above-average growth," Mr. Sido said. The fundamental analysis is the final stage, which he likens to "quality control." "The fundamental analysts' role is different than what you might see in a typical stock-picking system," Mr. Sido said. "The process gives us our best ideas, but the fundamental analysts are expected to evaluate the quality of that data." One company that fits the bill is Memphis, Tenn.-based AutoZone Inc. (AZO). "They deliver on the operational results even in a challenging environment," Mr. Sido said. "This is a company with a great management team that is controlling expenses, and they are focused on shareholder value." The stock closed Thursday at $128.44, up 7.1% since the start of the year. Questions? Observations? Stock tips? E-mail Jeff Benjamin at jbenjamin@investmentnews.com.