25 years of QEP Global Core: Slow and steady wins the race
We explore how our Quantitative Equities Product (QEP) team has been able to find a middle ground between passive and traditional active equity approaches, to apply the principles of fundamental investing on an industrial scale with its QEP Global Core strategy.
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Following four years of research, QEP Global Core was launched in late January 2000 at the tail end of the dotcom bubble. Not knowing then how long the animal spirits would last, we were tasked with the goal of creating a lower risk equity building block for Schroders’ Multi-Asset funds. The brief was simple enough; “Don’t mess it up”.
The use of quantitative techniques in active management was still in its relative infancy at the time. SSGA and Barclays Global Investors (now part of Blackrock) had launched enhanced index strategies for the US market in the early 1990s, but it was taking time for investors to wean themselves off the traditional fundamental approach to active management.
Popularity of low-cost passive investing encouraged demand for a middle ground
Despite this, increasing academic interest in the power of factor-based investing, coupled with the rapid improvement in data quality and computing power, offered a good entry point for systematic approaches as the decade drew to a close. The rising popularity of low-cost passive investing also encouraged demand for a middle ground between “hands-off” passive and traditional active approaches.
Considering this growing field of quant research and Schroders’ heritage in fundamental investing, we deliberately borrowed from both. From the former, we embraced the discipline and scale of a systematic process alongside a preference for diversification. From the fundamental side, rather than taking a one size fits all approach, we tailored our stock selection process to the business models we were analysing. Importantly, we also decided to own the risk management ourselves rather than outsource it to a model that was bound to fail. It was clear to us even then that “risk” is far more than volatility and correlation. But perhaps the most important choice we made was to anchor our investment process in value and quality. This was driven by our preference for building a fundamental process that could be applied on an industrial scale across the full global stock universe.
Strategy enjoyed a strong start in the wreckage of the dotcom boom
By the time we launched Global Core in January of 2000, it was clear that the market was in a bubble, but it was not obvious how long it would persist for. As it transpired, not long. The mania peaked in March 2000, and within two years the NASDAQ had lost almost 80% of its value (Source: LSEG Datastream, Schroders, covering the period between 31 March 2000 and 30 September 2002). Many of the standout funds and investors of the late 1990s suffered due to their overconcentration in tech. Timing was on our side, as the focus on value and quality meant Global Core got off to a strong start during the wreckage of the dotcom boom.
Since then, we have navigated several market cycles, a global financial crisis and the rising dominance of big US tech. We have stuck firmly to our investment philosophy throughout, but our approach has evolved over the years in response to market developments.
Enhanced index approach rests on core principles around quality and value…
We needed to recalibrate our framework for assessing balance sheet risks in 2007 which proved to be a prescient move as the Global Financial Crisis unfolded. More recently, we have incorporated structural growth as an additional pillar within our quality framework. But the core principle of identifying a company’s economic moat via quality and subsequently determining the required valuation premium or discount has remained steadfast and served us well over the years.
It is also a testament to our enhanced index approach, which is relatively modest in its aspirations, aiming to beat the index by an average of 1% a year, that we have been able to achieve this outcome since its inception. Notably, this has also come with a high degree of consistency across a range of market environments. The strategy has outperformed the index in 20 out of 25 years and boasts a monthly win rate of more than 61%. Based on our experience, slow and steady wins the race but it also imparts a valuable lesson about perseverance, patience, and humility.
…which has allowed it to exploit the one market constant of fear and greed
After 25 years of managing QEP Global Core, we would say the one constant has been fear and greed. This has always generated under and overreaction which can be exploited as part of a disciplined and risk managed investment process. The main lesson we have learnt is that by being modest in our goals and accepting that a less ambitious relative performance target is the price paid for consistency, we can still outperform both more active approaches and the index over time.
We believe our approach is very well suited to whatever lies ahead. The current investment outlook is unusually uncertain, but we know that we will be forced to navigate deglobalization, decarbonisation, demographic shifts and elevated market concentration. Paradigm shifts are rare, and reversion is our best friend but this needs to be balanced with evolving investment themes that are constantly rotating.
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