The investment process for the Emerging Markets Sustainable strategy can be summarized in three stages:
Stage 1: Value and Quality Ranks
We analyse an investment universe of 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 and assets) and Quality (based on measures of profitability, stability, financial strength and governance). 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 favourable combination of both Value and Quality.
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 aim for effective diversification across sectors, countries, market capitalisation and other investment themes such as macro-economic risk. Stock-specific risk is minimised by investing the portfolio across a minimum of 300 stocks.
While we do not consider country allocation a driver of relative returns, we do recognise 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.
Labour standards and environmental, ethical and social considerations
The Fund is managed with reference labour standards, and environmental, social and ethical (ESG) considerations when selecting, retaining and realising the Fund's investments by applying revenue exclusion screens (referred to as Negative Screens) and assessing companies on ESG characteristics. Schroders will then decide whether a company is eligible for inclusion in the Fund, based on this assessment and when determining position sizing within the portfolio.
Currency exposure is typically unhedged however currency derivatives may be used with equity index futures in managing cash flows or to manage active currency positions relative to the global equity indices for risk management purposes.