The INTECH U.S. Core Fund (T Shares) underperformed the S&P 500® Index for the quarter.
Within specific risk controls, INTECH's disciplined mathematical process establishes target weightings for stocks in the portfolio as a result of an optimization routine. Once the weights are determined and the portfolio is constructed, it is rebalanced and re-optimized on a periodic basis. Rebalancing requires buying some of a stock after a negative relative return and selling some of a stock after a positive relative return. This produces a buy-low and sell-high trading profit, on average, as stocks move up and down relative to the benchmark. The strategy has risk controls embedded in the investment process to aid in minimizing the portfolio's tracking error while also providing potential for excess return from the ongoing rebalancing routine.
Led by riskier segments of the market, U.S. equity markets continued to soar in the fourth quarter and posted double-digit returns in 2016. After being highly in favor by investors seeking an alternative to bonds in a low yielding government bond environment, consumer staples, utilities and real estate names underperformed significantly in the second half of the year in anticipation of upcoming interest rate increases and following the U.S. presidential election. The strategy's overweight to utilities and real estate was a significant detractor to performance during the quarter and year.
The financials sector, especially larger bank stocks, benefited from the expected rate increase as well as potential deregulation in the second half of the year, and was the strongest performing sector during the quarter. The strategy's underweight to mega cap financials was a significant detractor from relative performance during the quarter.