Global Equity Alpha
Schroders Global Equity Alpha is a concentrated strategy which targets outperformance of 3.0% per annum (gross of fees) versus the benchmark.
Schroders’ Global Equity Alpha strategy is focused on fundamental research, aimed at delivering strong outperformance over the longer term within the context of a risk management framework. We seek to invest in stocks that we expect to deliver forward earnings growth that will exceed the market’s expectations, i.e. stocks with a positive “growth gap”. We focus on only the very best investment ideas that are identified by Schroders’ team of locally based equity analysts and the global and international equities team of Portfolio Managers and Global Sector Specialists (GSS).
Our investment approach seeks to harness the persistent relationship between share price performance and earnings surprise. Using proprietary fundamental and sustainability research, the strategy seeks to invest in stocks that are expected to deliver forward earnings growth ahead of the market’s expectations; in other words, stocks with a positive “growth gap”.
We believe material differences between underlying company fundamentals and market estimates exist due to three persistent inefficiencies:
- Markets over reacting to short-term news flow.
- Markets extrapolating historic growth and failing to correctly interpret catalysts that change the trajectory of growth.
- Markets failing to look far enough ahead when appraising the earnings power of companies.
We believe there is a strong positive relationship between earnings surprise and share price performance. Furthermore, market participants consistently fail to correctly model or value companies delivering persistent long term earnings growth. These observations are demonstrated through time, presenting a persistent source of alpha, if applied systematically. This holds true irrespective of the market environment.
Our investment process is team-based and driven by proprietary bottom-up fundamental stock selection. The following chart summarises the three key steps of the process:
Source: Schroders. For illustrative purposes only.
Step 1: Idea Generation
Schroders’ GSSs are the primary source of idea generation, focussing on the highest ranked stocks of our local analysts as well as ideas generated from their own analysis and insights. Rather than looking at local market strength, the GSS team evaluates company strength relative to global sector dynamics. The investment team also uses a proprietary quant screen aligned to the team’s investment approach to highlight potential investment opportunities.
Step 2: Stock selection
The GSS team focus on identifying companies where the forward earnings growth is not yet identified by the market; we term this the “growth gap”. The GSSs build detailed earnings and cashflow models and conduct meetings with company management to develop their investment thesis and devise an earnings roadmap for each stock. The GSSs produce a fundamental risk score for all of the companies researched. This framework scores companies for operational, financial and geopolitical risk, as well as incorporating ESG factors into analysis.
Step 3: Portfolio construction and risk control
Using the ideas generated by the GSSs, portfolio construction is undertaken by our Portfolio Managers. Our risk-adjusted return expectations and conviction level then determines the position size of each stock. Stocks with a higher relative upside, lower fundamental risk profile and higher liquidity will receive higher active weights in the portfolio. When constructing portfolios, country weights are the residual of our bottom-up stock selection process combined with the appropriate client risk control overlay.
We believe that the following factors give us a sustainable edge in the management of global and international equity portfolios:
Well-resourced, highly experienced team
- Highly experienced in global investing
- Organized in a manner most suited to the global equity environment, (coupling local regional coverage with a global sector perspective)
- Supported by a robust research platform: Schroders has a network of regional equity analysts located across 11 countries worldwide, and all research notes and third-party reports are easily accessible though the firm’s intranet research database
Effective, bottom-up investment process
- Fundamental stock research and analysis is combined with a detailed assessment of the fundamental risk of owning each stock
- Process seeks to exploit specific inefficiencies identified across global equity markets
- Focus on trying to identify companies which will deliver a positive earnings surprise or “growth gap”
- Expansive global coverage
- Final portfolio reflects only the team’s very best ideas
Robust, multi-layered and innovative approach to risk
- Dynamic fundamental risk scoring framework incorporates a comprehensive analysis of multiple sources of stock risk (operational, financial, strategic, geo-political, management and ESG) into our assessment of return expectations
- Framework delivers systematic and objective fundamental risk scores for each stock in the portfolio, used in conjunction with statistical risk analysis for comprehensive visual assessment, position sizing and portfolio construction
- Disciplined approach to portfolio risk management with multiple layers of oversight and continual review, to drive return consistency
A focus on sustainable growth
- Integration of ESG within research and risk framework to assess the durability of earnings over time
- Centralised team of policy experts providing education, research and engagement resources
- Impressive track record of engaging with companies as active owners to improve long term returns
- Separate Accounts