QEP Global Quality
Global Quality aims to produce a long run return of +3% per annum (gross of fees) above international indices such as the MSCI All Country World Index (MSCI ACWI) over a full investment cycle.
Schroder QEP Global Quality is an index-unconstrained strategy designed to deliver higher long-run returns than the market. Analyzing a universe of 15,000 stocks for this strategy, the team constructs a highly diversified portfolio typically containing over 400 stocks.
Stock selection for this strategy is grounded in the analysis of company fundamentals indicating Quality: measures of profitability, stability (operational volatility), financial strength and governance. We believe that Quality offers a more stable form of growth investing, actively avoiding more thematic opportunities which we believe have a higher propensity to disappoint. Investment decisions are also informed by stock valuations, which helps us to avoid ‘overpaying’ for quality attributes.
We believe that intelligent portfolio construction can greatly enhance the ability to generate repeatable long-run returns. We reduce stock specific risk by building a highly diversified portfolio, but with conviction in every single stock. Recognizing the limitations of market cap-weighted indices, we take an index-unconstrained approach which enables us to invest wherever we find the best Quality opportunities and to capitalize upon those which may be missed by other global managers, including companies across the emerging markets.
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 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, Financial Strength, and Governance).
- We then use quantitative models to ‘scale up’ our process, which allows us to access the best opportunities across a broad global universe. These models 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.
The investment process of the QEP Global Quality strategy can be summarized in three stages:
Source: Schroders. 1 Internal guidelines only and are subject to change.
Capturing the long-term ‘quality premium’
Our research suggests that companies with high quality characteristics tend to deliver higher returns over the long-term. We analyze factors such as profit margins, the growth of dividends through time, earnings and sales to identify companies with a combination of the four key quality attributes: profitability, stability, financial strength, and governance.
A tendency to outperform in periods of rising risk aversion
Quality companies have tended to outperform particularly strongly in stressful market environments and when risk aversion is rising – environments when other long-run strategies can struggle to add value. We believe these companies are also less likely to experience the type of events which can seriously damage share prices such as cuts to dividends or large scale financial losses. By avoiding companies which we believe are more susceptible to dramatic price shocks, we think the strategy offers investors a more stable and consistent experience of growth investing. Win rate analysis indicates that the strategy has outperformed 90% of the time when markets are falling and at least 50% of the time when markets are rising.
Accessing quality companies globally
A globally unconstrained approach provides the crucial final step in our attempt to seek higher long-term returns. We focus on a global universe of 5,000 companies with market capitalizations of over $1 billion to maximize the investment opportunity. We then invest in a portfolio of over 400 stocks, offering investors exposure to a broad range of potential opportunities – across multiple regions, sectors and themes – with the additional benefit of significantly reduced stock-specific risk.
Region and sector weightings are determined from the bottom-up – as such, we are not forced to allocate to any given sector or country just because it is heavily weighted within an index, an approach which can cost investors in the long-run. The strategy is also able to benefit from the exciting opportunities offered by emerging markets.
- Separate Accounts
- Commingled Vehicle