Our investment process can be characterized by four distinct value-adding steps:
1) Filter universe: The team begins with a universe of stocks of approximately 1,800 international companies with market capitalizations greater than $2 billion. The universe is narrowed to approximately 1,000 by combining quantitative screening techniques (e.g. screening for sufficient size, liquidity, and financial metrics) with a qualitative review by Schroders teams of regional equity analysts located in 11 countries worldwide. The final group of approximately 1,000 stocks is subject to proprietary company modeling. Based on this work, each company is graded on a scale of ‘1 to 4’, with a grade of ‘1’ indicating a ‘strong buy’ recommendation, down to ‘4’ indicating a ‘strong sell’ recommendation. In this context, stocks are evaluated and rated relative to ‘local’ market peers.
2) Global and local research overlay: The GSS focus their initial work on stocks ranked ‘1’ or ‘2’ by the regional analysts, given that these constitute the strongest stock ideas within the respective regions. The GSS however are not bound by these recommendations and can and will identify interesting stocks which have not been given a ‘1’ or ‘2’ rating. The GSS team assess the modeling and analysis of the regional teams based on an independent view of growth- and risk- drivers. The GSS re-frame the investment recommendations relative to global sector dynamics and reflecting a global opportunity set.
This overlay serves to identify approximately 300 stocks which are considered potentially attractive stock ideas for further work and analysis.
3) Stock selection: Drawing on the condensed list of stocks, the GSS team focus on identifying companies which best capture the growth and risk characteristics that underpin the team’s investment philosophy. The GSS build detailed earnings and cash flow models, conduct meetings with company management to develop their investment thesis and devise an earnings roadmap for each stock, identifying where and why their view on a company’s forward earnings growth differs from consensus expectations. We also use proprietary quant screens, developed in-house by the Global and International Equity team, to confirm or challenge these fundamental views.
The GSS also develop a comprehensive risk score based on the fundamental analysis for each stock, which incorporates a wide range of risk factors from operational and financial, to strategic and ESG. The view on risk will be informed by the GSSs’ financial modeling, analysis and insight from Schroder’s ESG team, and meetings with company management, usually attended collectively by the relevant regional equity analysts, Global Sector Specialist and ESG Specialist.
Based on this work, the team’s GSS present stock recommendations for their respective sectors for potential inclusion in client portfolios. These stock recommendations will be characterized by a positive growth gap underpinning an expectation of share price outperformance and a detailed assessment of fundamental risk.
Stocks are categorized within the portfolio as either a Core or an Opportunistic holding. The classification is a means of expressing the expected holding period for each stock within the portfolio, and is largely a function of the sustainability of the growth gap and the time horizon over which the growth gap has been identified.
4) Portfolio construction and risk control measures: Utilizing these recommendations, the team’s portfolio managers collectively consider the merits of each recommendation in terms of a stock’s upside potential, downside risk and level of conviction around the presented investment thesis. Once concluded, each portfolio manager has discretion to apply relevant recommendations to the specific portfolios for which she or he has responsibility, bearing in mind the specified performance and risk guidelines and any client-specific guidelines, such as the application of exclusion lists and ethical screens. Ultimately, portfolio construction and position sizes are driven by our thorough assessment of the growth gap, our relative conviction, the stock’s liquidity and our fundamental risk assessment of the company.
