"Our model assumes the world is messy and non-linear," says Ted Theodore, Avatar's chairman and chief investment officer. "We needed a mathematical framework that can deal with how the world really works, which contrasts with a lot of the standard financial models that developed over the years that assumed the market was normal and had bell-shaped distributions."

Prior to joining Avatar in 1989 to share research director duties with Zweig (who no longer works at the firm), Theodore was a strategist/portfolio manager at Morgan Stanley Asset Management and the director of equity strategy at Citibank. He had done financial modeling similar to what Avatar was doing. "When the opportunity to join Avatar came, it was a natural fit," he says.

Avatar calls itself a value investor, but it doesn't rely on standard valuation measures such as price-to-growth, enterprise value, EBITDA and the like. "They all have their place," Theodore says, "but they are most effective on a three- to five-year horizon; 401(k) investors seem to have a three- to 12-month time frame when making investment decisions and reviewing their selections, so reliance on those standard valuation tools aren't as effective for short time periods."

Instead, Avatar employs "practical" value measures that combine a mosaic of investor actions and attitudes by keeping track of surveys and following gauges such as mutual fund flows and insider trading. "Insiders get it right when it comes to buying and selling," Theodore says, adding that insiders were in sell mode from summer through the autumn, but became buyers in recent months.

Some of the metrics Avatar parses are leading indicators of business--and thus, market--activity. As Theodore explains, the shape of the yield curve can impact profits because a wide curve is good for business and vice versa. In the credit markets, a spread between high- and low-quality might be a leading indicator for a currency.

"We don't forecast anything, but we measure lots of indicators in a multi-factor model," Theodore says. "We combine all those indicators into a composite scoring model most economists would call a diffusion index. It's a quantitative model requiring constant refining and the need to find new market drivers."

All of this modeling forms the backbone of Avatar's various portfolios, or strategies. These include risk-based strategies ranging from capital preservation (primarily fixed income) to aggressive growth (all equity), along with age-based, target-date strategies up to year 2050.

Avatar says financial advisors use the firm to be their investment strategist and to manage portfolios within the risk parameters they identify for the client, whether they be private investors or retirement plan participants. Carlson says Avatar obtains its 401(k) business through consultants, advisors to plan sponsors and record-keeping platforms.

Avatar runs eight portfolios in the non-qualified space, and offers five risk-based funds and nine target-date funds for 401(k) investors that are based on Avatar's overall investment strategies. Avatar's 401(k) offerings are in the form of collective trust funds, which pool assets of individuals and organizations into larger, diversified portfolios. These funds are exempt from the 1940 Investment Company Act and SEC registration, but are under the jurisdiction of bank regulators and the Labor Department. Thus, they fall under ERISA's fiduciary umbrella.

After a portfolio's asset mix is determined, Avatar stocks it with ETFs it thinks can grow earnings in the future but are relatively undervalued today. Theodore says the firm has 200 funds on its approved list, and uses between 20 and 40 at any time in each portfolio. They'll use ETFs for exposure to a range of asset classes, from stocks and bonds to commodities and real estate. With alternative investments, Theodore says Avatar recently bought an inverse ten-year Treasury ETF, which he says did well when Treasurys slumped toward the end of last year.