QEP Global ESG
QEP Global ESG aims to outperform the MSCI AC World Index (NDR) by 3% p.a. gross of fees over a full market cycle.1 In addition, the strategy aims to build portfolios that are positively exposed to stocks that perform well on ESG2 measures and avoid those that do not meet our minimum acceptable standards. Through engagement we also aim to encourage good practice from companies in terms of their environmental and social impact, as well as strong corporate governance.
1There can be no guarantee that any investment objectives or outcomes will be achieved.
2Environmental, Social and Governance is referred to as ESG throughout the website.
The strategy is active in all areas of ESG. We incorporate environmental, social and governance considerations into the investment process in four principal ways:
- Exclusions. We implement both industry-specific and revenue-based exclusions of ‘sin’ stocks defined as tobacco, alcohol, armaments and gambling stocks.
- Integration. ESG considerations are incorporated into our fundamental analysis of companies; we allocate more capital to stocks with good ESG characteristics and penalize those which are poor.
- Ongoing research. We analyze key ESG themes to look for opportunities to integrate these insights into our process.
- Engagement. Working in partnership with Schroders’ Sustainable Investment team, we carry out an active program of company engagement.
In addition to the ESG aspects of the strategy, stock selection is grounded in the analysis of company fundamentals indicating Value and Quality. The advantage of investing in both Value and Quality is that, while both tend to outperform over time, they deliver their returns at different stages of the economic cycle, creating the potential for outperformance across a broad range of market environments.
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 Value or Quality opportunities and to capitalize upon those which may be missed by other managers, including those at the lower end of the market cap spectrum and across 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.
Our fundamental insights are qualitatively implemented and can be summarized in three stages:
Source: Schroders. 1 Internal guidelines only and are subject to change.
Active in all areas of ESG: We integrate environmental, social and governance considerations into the investment process in a number of ways:
- Exclusions: We implement both industry-specific and revenue-based exclusions of companies facing increased risk given their business involvements, e.g. predatory lending and tobacco.
- Integration: ESG considerations are integrated into our fundamental analysis of companies through our proprietary QEP ESG Rating. In addition, we assess political and ESG risk at a country level and monitor developing positive and negative themes.
- Ongoing research: We analyze key ESG themes to look for opportunities to integrate these insights into our process.
- Active Impact: Engagement and Voting. Working in partnership with Schroders’ Sustainable Investment team, we have an active program of company engagement.
- Complementary fundamental return drivers: While ESG factors are clearly important in the stocks we own, we do not compromise on fundamentals. Both Value and Quality have tended to outperform over time, but 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.
- Conviction without concentration risk: We seek to reduce stock risk by building a highly diversified portfolio (typically at least 300 holdings). These are selected from a broad universe of over 7,000 ESG-rated stocks, systematically analyzed every day. We invest where we find the best opportunities, unconstrained by the index, and weight stocks according to conviction and risk, regardless of their market cap. Our portfolio construction tools allow us to manage the risk-return trade-off efficiently.