QEP Global Value Extension
QEP Global Value Extension targets gross returns of +5% above global indices over a full investment cycle.
QEP Global Value Extension builds upon our value investing approach through adding the flexibility to go up to 150% long attractively valued stocks while also being able to short low quality stocks up to 50%. Shorting stocks which we consider low quality can be a return enhancing strategy while also acting as a fundamental diversifier for value stocks. Adding a distinct and diversifying short low quality strategy potentially creates greater flexibility to add value across different market environments while retaining a strategic bias towards high returning value investing.
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.
Justin Abercrombie joined Schroders in 1996 and was a founding member of the QEP team, leading the development of the team and product range. As Head of QEP Investment Team, Justin oversees QEP's innovative range of global equity strategies.
David Philpotts is the Head of Research on the QEP team. David joined Schroders in 1996 as an economist before moving to the QEP team in 1999 helping to build the team’s stock selection models. David left Schroders between 2001 and 2003 to run a hedge fund before re-joining Schroders in 2004 as Head of QEP Research. His investment career commenced at the Bank of England in 1990.
Stephen Langford, CFA
Stephen Langford is a Portfolio Manager on the QEP team. He joined Schroders in 2003 and is a senior portfolio manager and analyst across all QEP products. Stephen's investment career commenced at Quaestor Investment Management in 1999, where he was a Senior Research Manager and Portfolio Manager of a Japanese market-neutral fund.
Michael O’Brien is a Portfolio Manager on the QEP team and based in New York. He joined Schroders in 2008. Prior to joining Schroders, he worked for the University of Queensland and the University of Sydney in a research and teaching position. He holds a PhD in Finance from the University of Queensland, a BComm (Hons) in Finance & Economics and a BSc in Biochemistry from the University of Sydney.
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 identifying future risks and return opportunities.
Our investment process can be summarized in three stages:
Stage 1. Global Value and Quality Ranks
To maximize the potential investment opportunity, the team analyzes as broad a universe as possible – over 15,000 stocks (screened for liquidity) of all sizes across over 40 countries, including both developed and 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
Candidates for our long positions are based on a company’s position within the Global Value Rank and its business quality (based on measures of profitability, stability and financial strength).The team invests from the cheapest third of the Global Value Rank (when a stock falls out of the top third of this rank it is automatically sold) with the sizing of positions determined by its quality as well as considerations of liquidity and likely market impact. Wherever possible, cheap stocks with high quality attributes are prioritized. Candidates for shorting are selected from the lower half of our Global Quality Rank. This has the potential to be a profitable strategy in its own right while also diversifying the whole portfolio.
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 seek to ensure effective diversification across global sectors, countries, market capitalization and other investment themes such as macro-economic risk. The maximum position size for any individual stock is 1.00%.
Bottom-up region and sector weightings – we only invest where we find value. If we cannot find cheap stocks in a particular country we prefer to take the long-term view and hold a zero weighting. A good example is avoiding investing in the Japanese stock market bubble in the early 1990s.
Shorting – Short candidates from the lower half of the Global Quality Rank must also be available and inexpensive to short. We avoid shorting stocks that are in the top 1/3rd of the Global Value Rank and small caps and limit individual short positions to less than 0.5% of the portfolio.
Diversification – We seek to optimize the portfolio on a daily basis to search for the best value stocks, while also paying careful attention to portfolio diversification and any changes in shorting costs. Typically the portfolio holds well in excess of 500 stocks long and 200 short positions.
Trade execution – We tailor trade execution to local market conditions to minimize the total cost of trading in all markets. Typically in more developed liquid markets, we primarily use direct market access and sophisticated computer algorithms which actively minimize the impact costs.
Net Exposure & Currency Management – We will allow the net position to vary away from 100% if the varying market sensitivity of both the long and short portfolios are quite different or due to the current investment environment but will typically remain between 90% - 110%. Currency exposure is also risk managed around the index currency weights.
- Maximized exposure to the long-term Value opportunity
Investing in companies on the basis of valuations is a powerful investment strategy which historically has generated some of the best returns for equity investors, particularly over longer holding periods. Global Value Extension offers the flexibility to maximize exposure to this profitable long-term strategy by enabling our managers to invest up to 150% of the portfolio long attractively priced stocks. Like all strategies managed by the QEP Investment Team, this opportunity set is captured through a highly diversified portfolio of more than 500 long positions. This approach means that we may capture higher returns while benefiting from minimized stock-specific risk.
- Bottom-up, index unconstrained investing maximizes the opportunity
Our approach maximizes the potential return opportunity by systematically analyzing over 15,000 global stocks every day; many of these stocks are outside mainstream indices. The more attractively-priced stocks we find in a particular region or sector, the greater the allocation.
- Shorting Lower Quality stocks can act as both style diversifier and return driver
We believe that Quality is the natural, diversifying complement to Value. By incorporating the ability to short up to 50% of the portfolio in stocks which are Lower Quality (as defined on measures of profitability, stability and financial strength), the strategy potentially is able to generate returns in some environments which are not suited to pure Value strategies, delivering performance across a broader range of market environments. Moreover, our research suggests that not only does the ability to short Lower Quality stocks act as an effective style diversifier, but that it may be a profitable return strategy in its own right.
- Separate Accounts