Amalgamated Bank applies a number of strategies in investing monies entrusted to it by a large number of union related pension and health and welfare plans. It offers active and passive equity and fixed income strategies to meet the requirements of its clients.
PASSIVE
Amalgamated's passive equity investment strategy seeks to provide investment results that approximate the performance of the targeted Standard & Poor's Composite Index (the "S & P Index"). Using this strategy, Amalgamated will invest in all the stocks that are contained in the targeted S&P Index, in approximately the same proportions as they are represented in that Index. This indexing technique is known as "full" or "complete" replication.
This strategy offers the advantage of low portfolio turnover and related transaction expense. Generally, Amalgamated will only rebalance the passive strategy portfolio to account for changes in the composition of the targeted S&P Index and the timing and size of admissions and withdrawals.
The passive equity strategy may also employ Standard & Poor's Depository Receipts ("SPDRs") or similar exchange-traded composite securities, which represent ownership interests in a long-term unit investment trust that is sponsored by a subsidiary of the American Stock Exchange and holds a portfolio of stocks designed to track the performance of the targeted S&P Index. SPDRs are traded on the American Stock Exchange, Inc. SPDRs are subject to the risks of an investment in a broad-based portfolio of common stocks, including the risk that the general level of stock prices may decline.
ACTIVE
Through its active investment strategy, Amalgamated Bank seeks to provide investment results that exceed returns of the corresponding benchmark by 100 to 150 basis points over a market cycle. This strategy contemplates that Amalgamated will invest in some, but not necessarily all, of the common stocks included in the S&P 500 Index. The intent is to maintain overall investment characteristics similar to the benchmark index, but not to fully replicate the index. We look to add value to the portfolio through a highly-controlled process that employs quantitative analysis of portfolio behavior and other methods of statistical analysis.
This strategy employs a three-step decision-making process for portfolio management:
- Classify stocks by growth rate
- Calculate expected return
- Construct optimal portfolio
Step 1: Classify Stocks by Growth Rate
A universe of the 3000 largest U.S. stocks is segmented into categories according to growth rates, ranging from slow growth to fast growth. This categorization facilitates applying the most appropriate selection criteria for each type of stock.
Step 2: Calculate Expected Return
Different valuation models are applied to each category of stocks (from Step 1) to calculate an expected return or alpha for each stock in the universe. The primary factors include valuation indicators such as (forward-looking) earnings price (e/p) and book to price (b/p) (and the changes in these variables), news regarding future growth opportunities, insider trading, measures of earnings quality and reliability and recent price performance. The models for slow growth stocks emphasize variables related to current fundamentals (e.g., price to earnings, price to book). The models for fast growth stocks emphasize variables related to future earnings (estimate changes). Once each stock has been evaluated, an expected return is assigned.
Step 3: Construct Optimal Portfolio
Using a developed optimizer, portfolios are constructed that maximize expected return (calculated in Step 2) subject to targeted tracking error and constraints on specific risk exposures. Deviations from the benchmark on exposures such as size, growth/value, industry, sector and individual security risk are constrained so that portfolios focus risk where it is most likely to add value.
International Equity
Amalgamated Bank’s approach to active fiduciary oversight is combined with NWQ Investment Management’s extensive experience in supervising international equity portfolios. Our objective is to exercise sound investment judgment to achieve competitive risk-adjusted rates of return, while creating value for employers and workers. Benchmarked against the Morgan Stanley Capital International (MSCI) Non-US Equity Index, Amalgamated Bank makes investments in a broad universe of companies headquartered outside the United States.
Our strategy is to provide superior risk-adjusted returns through an opportunistic value-oriented process using foreign equities. The assets are invested in companies that are undervalued and where a catalyst exists to unlock value or improve profitability. The stock selection process combines bottom-up fundamental research with proprietary quantitative screening. Quantitative analysis focuses on traditional value metrics while qualitative analysis seeks to identify misperceived fundamentals, competitive advantages, financial strength, opportunistic catalysts, and franchise quality.
Investment Management Services
Amalgamated Bank offers investment management and fiduciary services for clients’ Private Equity investment programs. We are qualified to serve as a Qualified Professional Investment Manager (QPAM) and assist clients in developing and implementing a Private Equity investment program. We provide monitoring and reporting services as well as the coordination of capital calls and distributions.
Private Equity Fund of Funds
We provide private equity fund of funds focused on identifying and investing with high quality private equity managers.
GENERAL
Domestic fixed income securities are selected using a highly controlled and disciplined approach. To achieve investment objectives, Amalgamated Bank's investment process focuses on duration and maturity management, supplemented by yield curve analysis, sector allocation and security selection. The investment process can be best described as a top-down approach. The Bank's fixed income strategies follow a stratified sampling approach with emphasis on credit research. Decisions regarding the implementation of investment policy are reached using a team approach led by the Director of Fixed Income and closely monitored by its Trust Investment Committee.
Amalgamated applies disciplined risk management to its fixed income strategies that provides market rates of return with low volatility. We do not attempt to anticipate interest rates. Instead, we use a methodology that seeks to ascertain our clients' investment needs and expectations to provide them with an appropriate investment strategy and performance benchmark.
Based upon the selected benchmark, we construct a portfolio of securities with expected returns closely correlated with the benchmark. Our method of investment management requires us to first separate out the various risks in a portfolio of fixed income securities, namely: duration, yield curve, asset allocation and security selection. For each of these four key determinants of fixed income investment returns, we have placed restrictions on the degree to which any one can have an impact on performance relative to the benchmark. By establishing a range of acceptable deviation from the performance benchmark, we have also established a range of expected residual return.
As active investment managers, we add value by outperforming the benchmark index. Adding value requires assuming a certain level of risk. We define market risk as any deviation in investment strategy from that which is prescribed by the benchmark index. For example, the Lehman U.S. Aggregate Index has certain duration and market weightings among the asset classes included in the index. Any time our duration or asset allocation deviates from that of the benchmark, we have assumed market risk. In making such a decision, we apply our own economic and market knowledge to the investment process to determine what holds the best prospect for future total return. This is a relative value judgment, which is arrived at by analysis of historical economic and market patterns in juxtaposition with current market values.
Our investment philosophy eschews interest rate anticipation and yield curve risk in favor of asset allocation and issue selection as means for outperformance. As such, duration and yield curve positioning do not significantly deviate from the benchmark index.
Once we have determined an appropriate duration, we decide on our asset allocation policy. Again, we measure our risk as the degree to which we are willing to deviate from the market value allocations represented in the appropriate benchmark. Here, through an analysis of historical and current return patterns among the broad asset classes, we arrive at a judgment regarding relative value, defined as future return prospects. The benchmark asset class for this process is U.S. Treasury securities. All other asset classes are judged in terms of their return prospects relative to U.S. Treasury securities. In other words, the risk premium in non-treasury securities is the excess yield earned over the yield on a comparable maturity treasury security.
The final step in market risk management is issue selection. Upon completion of the asset allocation process, portfolio managers will use relative value to determine individual issue selection. The manner in which this procedure is executed is much like the asset allocation process; however, consideration is given to individual securities rather than broad asset classes.
Returns using Amalgamated Bank's active fixed income strategies depend on four factors: duration, yield curve, sector allocation and security selection. Amalgamated Bank has a controlled approach to the fixed income management process. Since duration and yield curve exposure account for the largest variance of the four contributing factors, we choose to limit risk by minimizing the deviation from the benchmark. We control duration risk by seeking to limit portfolio duration variance to +/- 5% of the benchmark index. Furthermore, we manage the yield curve risk by seeking to limit portfolio exposure to +/- 15% at any point on the yield curve, relative to a benchmark.
We add value through sector rotation and security selection. The fixed income team at Amalgamated has found this to be the best overall method for adding value in a consistent fashion without exposing the portfolio to undue risk.
We determine our sector allocation and security selection based on:
- Past historical relationships between sectors
- Economic fundamentals
- Technical analysis of sectors
- Seasonal factors
- Overall interest rate environment
- Inefficiencies in the market
Amalgamated Bank's Core Strategy seeks to invest in a portfolio that is substantially similar to the Lehman U.S. Aggregate Index using an index sampling technique to choose securities that replicate the characteristics of this benchmark. This statistical sampling technique takes into account such factors as duration, maturity, sector allocation, security structure and credit quality and attempt to match the investment characteristics of the benchmark index. Our investment process focuses on maintaining risk characteristics similar to the Index. We do not change the portfolio based on changes in the shape of the yield curve or the direction of interest rates.
The Core Strategy does not seek to duplicate the benchmark index. Rather, Amalgamated seeks to maintain the relative weightings of sectors in the portfolio to correspond to their respective weightings in the index. Amalgamated expects to be able to invest within +/-3% of the actual index weighting of broad market sectors. The Core Strategy is intended to cause the portfolio to react to changes in interest rates similarly to the index which, in turn, generally reacts similarly to bonds with maturities between four and ten years.
The objective of this strategy is to provide a stable rate of return that over time will be equal or greater to the benchmark. The portfolio consists of a diversified pool of construction loans for new construction or renovation projects that meet Amalgamated Bank's underwriting criteria first and that are built using 100% union labor. The weighted average maturity of the portfolio typically falls within a range of one to three years. The underwriting criteria and the construction lending policy are very conservative and strive to diminish the risk associated with construction loans.
