It is time for our semi-annual reminder on model-style box confusion.
Advisors are addicted to the leaderboard.
It is the first thing you look at. You pull up a database of investment models, sort by the 5-year or 10-year CAGR, and gravitate toward the biggest number at the top.
It is a natural instinct. You want growth. You want to show your client a winner. But nine times out of ten, this is a strategic error.
We call it the CAGR Trap.
Here is the scenario: You have a strict allocation in a client’s portfolio for U.S. Large Cap exposure. But instead of looking for the most robust Large Cap model, you scan the entire universe for the highest historical return. You end up plugging a volatile Mid Cap growth strategy into a hole meant for the S&P 500 because the "backtest looked better."
You aren’t managing risk; you are engineering a disconnect.
The Science of the Gap
You are asking an apple to behave like an orange just because the orange is bigger.
Example: Utilizing an all-cap biblical investing model with limited industry exposure is probably not the best choice if you need that portion of the portfolio to track the movement of a mega-cap, tech-heavy S&P 500 index.
When the market rotates and Large Caps hold steady while Mid Caps or niche strategies tank, you are left with massive tracking error and a client asking why they are losing money when the evening news says the market is flat.
The Fix: Alignment Over Alpha
The simplest path is usually the right one. Stop trying to outsmart the room and start matching the asset.
This doesn't have to be a guessing game. You can filter specifically for the exposure you need—Large Cap, Mid Cap, Small Cap—using the Market Cap dropdown on the iQUANT Model Finder.
Also, note that the optimizer can force weights into Mega or All Cap styles. We are trying as hard as we can to help with this!
Your client won't fire you for matching the benchmark. They will fire you for the surprise of underperforming it because you chose a style box they didn't authorize (or understand).
Be precise.
The Swap: Precision in Practice
If you have a mandate, fill it with the specific tool designed for that job. Here are some examples of how you can align the model to the mission:
Large Cap Growth
The Model: iQUANT Mega Cap 10
Why: It targets ten domestic corporate titans based on a time-tested multi-factor approach. It is designed to act like a better S&P 500, not a lazy index fund.
Mid Cap
The Model: iQ S&P SMid Cap Efficiency
Why: Systematically selects 20 mid and small cap stocks based on Share Buyback and Volatility-Adjusted Plowback Ratios.
Small Cap Value
The Model: iQUANT Small Cap Value
Why: Systematically targets the cheapest, highest-quality small caps relative to the S&P 600 Value index.
Income
The Model: iQ Income Risk On / Risk Off
Why: Rotates into top-performing bond ETFs when determined to be safe, and moves to cash when volatility spikes.
International
The Model: iQUANT International Buyback & Dividend
Why: Focuses specifically on non-U.S. companies that return capital to shareholders.
Risk Parity
The Model: iQ All Assets Risk On / Risk Off
Why: Benchmark this against the S&P Risk Parity Index - 10% Target Volatility. It hunts for positive returns across asset classes and market directions.
The Alignment Checklist
Before you add a new model to a portfolio, run it through this filter. If you answer "No" to any of these, put the model back on the shelf.
Does the model’s benchmark match the slot we are trying to fill? (e.g., Don't put a Nasdaq-heavy model in a Value slot).
Is the historical UP MARKET Beta, correlation and capture ratio above .8 on average?
If the S&P 500 is flat and this model is down 5%, can we explain why in one sentence?
Are we buying this purely because the 5-year number is high? (If yes, stop).
Align the strategy with the mandate. CAGR does not equal correlation!