QEP Emerging Markets
QEP Emerging Markets seeks long-term capital growth.
QEP Emerging Markets is an active, index-unconstrained strategy seeking to deliver higher long-run returns. Analyzing a universe of over 4,000 stocks across more than 20 emerging markets, the team uses a bottom-up approach to construct a highly diversified portfolio of over 300 stocks.
With a return target of +3% p.a. against MSCI Emerging Markets, our strategy 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.
Our investment process can be summarized in three stages:
Stage 1: Value and Quality Ranks
We analyze an investment universe of over 4,000 companies across more than 20 emerging markets. Each company is ranked by value (determined across a wide range of metrics including measures of dividends, cash flow, earnings, sales and assets) and quality (based on measures of profitability, stability and financial strength). 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. In addition, financial companies are evaluated using a range of specific metrics to measure leverage, liquidity and funding risk.
Stage 2. Stock selection
Decisions on stock selection are based on a company’s position within the Global Value and Global Quality Ranks. We select stocks from either the top third of our Value Rank or the top third of our Quality Rank, focusing on stocks with a favorable combination of both Value and Quality. The weighting of these stocks is then informed by our assessment of further fundamental factors, including their liquidity and volatility.
Stage 3: Portfolio Construction
A disciplined and sophisticated approach to portfolio construction is one of the team’s most significant competitive advantages. Constructing a portfolio which efficiently balances risks with rewards is the key responsibility of our fund managers who ensure effective diversification across sectors, countries, market capitalization and other investment themes such as macro-economic risk. Stock specific risk is minimized by investing the portfolio across a minimum of 300 stocks.
While we do not consider country allocation a driver of relative returns, we do recognize that it is important to be mindful of our portfolios’ exposure to areas of increasing risk. This is particularly important within emerging markets where less developed financial systems and more concentrated economic outputs have tended to amplify the sensitivity of individual countries to both internal and external shocks.
Our proprietary country risk model is not designed to be used as a predictor of future returns or to signal an impending crisis. Rather, its outputs are designed to offer a measure of country ‘quality’ and a means of monitoring our overall exposure to areas of mounting risk and adjust positions accordingly.
An overall country risk ‘ranking’ is driven by consideration of five key factors:
1. Currency Valuation – Real exchange rate relative to history.
2. Currency Credibility – Trade balance, FX reserves, reliance on external funding, volatility and sensitivity to commodity markets.
3. Credit – An assessment of a country’s ability to finance its sovereign debt; we examine financing requirements and debt servicing costs to evaluate the potential for any default.
4. Growth – We measure the ability of a country to sustain growth without creating economic imbalances such as excessive trade deficits, rising government debt or unsustainable levels of private sector borrowing.
5. Political/ESG (Environmental, Social & Governance) – Indicators of corruption and economic freedom (e.g. the importance of property rights, labor laws and the regulatory environment).
- Stock selection based on complementary fundamental 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. By investing in both Value and Quality opportunities we think we are able to offer investors the potential for greater consistency of outperformance across a broad range of market environments.
- 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 300 stocks. This level of diversification not only means that investors are exposed to a broader range of potential return-boosting opportunities but also that the risk that the failure of a single investment could materially damage the overall portfolio is reduced. 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: We believe there is ample scope for an active manager to add value in emerging markets. Recognizing the limitations of cap-weighted developing market indices which tend to be excessively concentrated in certain dominant sectors, such as Financials and Resources, we take a benchmark-unconstrained approach. We believe that this enables us to invest wherever we find the best value or quality opportunities and to capitalize upon opportunities which may be missed by other managers. Stocks are also weighted according to their fundamentals – valuations and business quality – as opposed to market capitalization.
- Separate Accounts
- Commingled Vehicle