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A Fund for All Seasons

Derek Izuel, portfolio manager of the $409 million AIM Global Equity Fund/A (GTNDX), says he is always looking for ways to improve the models that are the basis for his quant-driven portfolio. When Izuel joined the fund at its September, 1997, launch, it was a "fund of funds" -- its strategy switched to direct equity investment in September, 1999.

The following June, Izuel became lead manager. He now presides over a five-person quantitative team that mines databases for stocks of all sizes and sectors around the world that are likely to outperform.

The fund has beaten its global equity peers over the long term. Over the three- and five-year periods through November, 2005, the fund gained 19.85% and 7.5%, respectively, vs. returns of 16% and 2.51% for the peer group. However, it has lagged slightly in the short term, rising 10.35% in the one-year period through November (vs. 11.62% for the peers). The fund carries Standard & Poor's highest rank of 5 STARS.

In late September, portfolio manager Eric Thaller left the fund and was replaced by Duy Nguyen, who is also lead manager of the AIM Select Equity Fund/A (AGWFX).

As of Oct. 31, the fund's top five positions were Moody's (MCO

, 2.6% of assets), Greek Organization of Football (2.6%); ING Groep ADS (ING

, 2.2%), Kyushu Electric Power Co. (2.1%), and Tesco (TESOF

, 2.1%). The U.S. accounted for 55.7% of the fund's assets, making it the top country allocation, followed by Japan, 9.1%; U.K., 8.4%; France, 5.4%; and Greece, 2.6%.

The fund's turnover ratio (115.0%) is significantly higher than that of the peer group (69.3%). Its expense ratio of 1.94% is somewhat higher than the 1.52% peer average.

Carol Wood of Standard & Poor's Fund Advisor spoke recently with Izuel about his investing strategy. Edited excerpts of their conversation follow:

What's your investment philosophy?

Our process is primarily quantitative and uses two statistical models. The stock selection model forecasts returns for all companies in our universe. The risk model predicts how companies behave when the global macroeconomic environment changes. Our objective is to outperform in all kinds of markets. I like to call it a "fund for all seasons."

We're basically bottom-up investors. We use the models to try to generate outperformance from individual stock selection.

How large is your universe?

Our investment universe comprises 5,000 domestic and international large-, mid-, and small-cap stocks that have a measure of liquidity. We draw upon any public company with at least 6 to 12 months' worth of data, and enough liquidity that will allow us to build a reasonably sized position.

How do you construct your models?

We build our models by looking at up to 30 years of historical data -- including valuation, earnings growth, changes in earnings expectations, and price behavior. We look to see if there are relationships between that data and how the stock subsequently performed. Some years ago, we built individual models for each sector, so we now have 12 models for each area, focusing on criteria that are effective in each sector.

Can you discuss your risk model?

Our risk model looks at the price behavior of all companies in our universe, relative to the global macroeconomic environment, measured through eight risk factors. Four of those factors relate to changes in interest rates, in currency exchange rates, in the health of emerging market economies, and in the price of oil. The other factors are related to market cycles: style (growth vs. value); size (small- vs. large-cap); geographic cycles (how regional markets are performing); and industry or sector cycles.

With the risk model, I can balance one stock that benefits from a certain change with another stock that's hurt by it. For example, take an energy stock, which has a positive relation to the price of oil. We would look for another stock that has the opposite exposure -- say, an airline or chemical company -- to neutralize the oil price effect.

How do you operate the fund on a day-to-day basis?

The models are run automatically every day on all 5,000 companies. Every four to five weeks, we'll have a set of buys and sells to rebalance the portfolio. We make sure the data is correct and the reason to buy or sell is valid. We also check to see if companies in the portfolio are involved in mergers and acquisitions, investigations, or other events outside the scope of our models.

Ultimately, Duy and I decide whether something we've discovered is enough to override the system. We execute the buys and sells all at once in a program trade.

When do you sell a stock?

Our sell discipline is the opposite of our buy discipline. The stocks are reevaluated every day; if they start to deteriorate, particularly on the forecasting side, we would think about lightening our exposure.

What's your benchmark?

We use the MSCI World Index of developed market equities. Our sector and regional allocations are close to those of the benchmark.

Are there any areas or sectors that you avoid?

No, we try to keep the companies in each sector with the best chance of outperforming.

Could you take a top holding and discuss how it reflects your investment style?

We bought a medium position in a gaming company called Greek Organization of Football. The stock has since grown. The company got new contracts to offer betting on dog races, which analysts felt would be beneficial, and so increased their earnings estimates. This company fits into the risk metrics of the portfolio because it covers the consumer products sector and it's also a mid-cap European stock.

Do you expect to benefit from the growing trend toward international investing?

Unfortunately, a lot of investors chase returns. With international stocks strong in 2005 and, to an extent, in 2004, we're going to see a lot more exposure to those types of products.

Investors should always have a significant portion of their assets in international stocks. I believe U.S. investors have invested less than 5% of their equity portfolios in non-U.S. equities, which represent some 50% of the global market. So there's a lot of room to grow that percentage.

What's your outlook for various foreign markets?

My opinion is that the lion's share of the returns are going to come from non-North American equities -- Japan, Europe, and maybe the U.K. The caveat is that this is my opinion; I don't base our portfolio's holdings on it.

While U.S. stocks outperformed international equities throughout most of the 1990s, non-U.S. equities outperformed through most of the 1980s. You can have these long-term cycles where one part of the world outperforms the other. If you believe in cycles like that, we're probably getting into one where international stocks will be more attractive.

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