QEP Global Blend Equity
The QEP Global Blend strategy seeks to produce a long run return of +3% per annum (gross of fees) above the MSCI All Country World Index or comparable global benchmarks.
QEP Global Blend is an active, index-unconstrained strategy seeking to deliver higher long-run returns. Analyzing a universe of over 15,000 companies, the team uses a bottom-up process to construct a highly diversified portfolio of over 400 stocks.
QEP Global Blend invests in stocks on the basis of valuations and business quality. The advantage that we see of combining Value and Quality opportunities is that, while both have tended to outperform, they have delivered their returns at different stages of the economic cycle, offering investors the potential for outperformance across a broad range of market environments.
The QEP team have been managing global equity portfolios since 2000. They use an investment philosophy that is based upon combining fundamental data and well-researched behavioral insights, placing considerable emphasis on portfolio construction and genuine diversification of risk.
There are three distinct components to the QEP team’s investment philosophy:
- All stock selection is focused on two key fundamental drivers of long-run equity returns: stock valuations and business quality (as defined by measures of Profitability, Stability and Financial Strength).
- We then use quantitative tools to ‘scale up’ our process, which allows us to access the best opportunities across a broad global universe. These tools enable us to maximize the opportunity set and re-balance portfolios in a disciplined way as opportunities evolve
- Finally, experienced investors are responsible for implementing every trade decision, ensuring proper diversification and seeking to identify future risks and return opportunities.
Stage 1. Global Value and Quality Ranks
We invest from the broadest possible global universe of stocks while screening for sufficient liquidity to trade without undue market impact. We analyze the fundamentals of 15,000 companies every day from both developed and emerging markets and rank them in terms of their value and quality. The value of a company is determined across measures of dividends, cashflow, earnings sales and assets. Quality is assessed using measures of profitability, stability and financial strength, as well as specialized balance sheet measures for financial companies. These ranks are re-calculated on a daily basis in order to ensure that the latest information is incorporated e.g. price movements and company fundamentals. They are combined to form our Global Blend Rank.
Stage 2. Stock selection
We select stocks from the top third of our Blend Rank, focusing on stocks with a favorable combination of both value and quality. We then decide how much of each stock to own by further assessing each company on additional fundamental factors, including management indicators and dividend history. Other considerations in scaling position sizes include measures of risk and also the liquidity and volatility of the stock (i.e. the likely market impact of trading it).
Stage 3. Portfolio construction
Constructing a portfolio which efficiently balances risks with rewards is the key responsibility of our portfolio managers. They ensure diversification across regions, sectors, market capitalizations and investment themes. Portfolio construction is driven by bottom-up stock selection decisions made on the basis of our evaluation of a company’s quality, valuation and other factors as described above; this process is not influenced by benchmark weights. We limit stock specific risk by usually investing in over 400 stocks and the maximum position size for any individual security is 0.75%. The team has built an impressive track record in the implementation of investment decisions and actively work to minimize the costs of trading.
- Stock selection based on complementary return drivers – Stock selection is grounded in two clear fundamental drivers: company valuations and business quality (as defined by profitability, stability and financial strength). We believe these two characteristics are the key drivers of long-run equity returns and are, moreover, highly complementary in that they have tended to perform at different stages of the market cycle.
- A truly diversified, actively managed portfolio – We rank stocks on a daily basis across multiple valuation and quality criteria to build a diversified portfolio of over 400 stocks. This level of diversification not only means that investors are exposed to a broader range of potential return-boosting opportunities but are also protected from the risk that the failure of a single investment could cause material damage to the overall portfolio. We do not believe that conviction should be confused with concentration. While highly diversified, our strategy typically exhibits an active share in excess of 70%.
- Look beyond the index to maximize the opportunity – A globally unconstrained approach provides the crucial final step in our attempt to seek higher long-term returns. We track a global universe of over 15,000 stocks to maximize the investment opportunity. By looking beyond the index, we are able to exploit the potential of companies across the market capitalization spectrum and emerging markets.
- Stock weights determined by fundamentals, not market cap – In market cap weighted indices, the very largest, so called ‘mega cap’ stocks crowd out other investment opportunities as too much of the portfolio gets allocated to them by virtue of their size. In some respects, very large company size reflects past success or can be a naive extrapolation of future prospects. Over allocation to past success creates an inefficiency in the index, with momentum-like characteristics. Our approach is to weight stocks based upon their fundamentals and liquidity. This is more balanced and reduces the problem of the ‘mega-cap’ drag which is particularly acute for other value investors.
- Separate Accounts