The IQS Dynamic Factor Model -
Stock Ranking Process

IQS has a unique stock ranking process that uses sophisticated algorithms to forecast the effectiveness of each financial factor:

Investment Factors
We calculate scores for approximately 70 factors. Roughly 30-50 factors are weighted each month to determine the IQS Rank, resulting in five factor categories:

• Value Measures: Compares the current stock price with earnings, growth of earnings, or dividend yield.
  
  
• Momentum Indicators: Includes price and volume momentum, as well as price reversals.
  
  
• Balance Sheet Strength: Determines the relative strength of balance sheet ratios.
  
  
• Financial Improvements: Indicates whether the company’s financial measures have improved.
  
  
• Sentiment: Includes Wall Street analysts' beliefs about a stock.
  

Market Environment Indicators (MEI)
IQS’ proprietary MEI technique gives the model additional value. Certain factors perform statistically better or worse in different market environments. We systematically adjust the forecasted effectiveness of a factor for the market environment. For instance, in a highly volatile market environment, earnings matter less. This is true for two reasons. First, if prices are much more volatile than earnings, then the relationship between the two can not be strong. Second, if the market is extremely volatile, then exogenous influences, such as terrorism or spikes in oil prices, create uncertainty. We include a variety of indicators in our process. The indicators do not change the forecast for each factor every month, but rather affect the factor forecast only when the indicator is statistically robust

Forecast Skill
At IQS, we believe that a successful investor does not try to replicate the past, but learns from it. We incorporate Bayesian and other statistical forecasting techniques to arrive at better predictors of skill that go into our weighting scheme. One such technique uses IQS's Market Environment Indicators.

Model Weights
We include the best forecasts for skill and factor covariance into our model weight process. The IQS weighting scheme is dynamic and sound. The weights change every month, incorporating various effectiveness measures to determine the weights.