20080521-Citi-Value Realized：Looking For the Probable

Dynamo Value plus Momentum: Sector Focus
 Value + Momentum = Value Realized — Our Radar process seeks to exploit a
simply truism: Cheap stocks with good momentum will outperform expensive ones
with weak momentum. With Dynamo, we re-calibrate our basic (and still core)
methodology to make it even more market sensitive – harnessing a dynamic "fairvalue"
model (introduced last year) to our framework for tracking momentum.
 Dynamic Value — We introduced our dynamic-value model to drill deeper than the
cross-sectional process adopted by our regional model. As such, we can build
specific models across a wide range of factors – including measures of balance
sheet strength and earnings quality – without data mining or over-fitting. The
methodology is described inside (Appendix 1).
 Fair Value vs. Markets — "Fair-value" defines notionally sustainable price levels for
individual stocks. Still, stocks can trade away from "fair value" for long periods.
Our momentum (i.e. investor-sentiment) screens are designed to identify the more
likely price-path: probable rather than possible. Sensibly valued stocks with
positive sentiment tend to perform well, or course. Finding them is the challenge.
 Sector Focus – Last week we introduced this from a country perspective. Here, we
present the back test results of investing based on this process in each sector. We
find that the process adds value as defined by a high information ratio in
Telecoms and Media, Energy, Metals and Mining, Industrials and Financials while
concurrently having negative (or nearly zero) correlation to its sector benchmark.