QEP Global Core
QEP Global Core is an enhanced index strategy that seeks to outperform the MSCI World Index (net dividends reinvested)** by 1.0% per annum (gross of fees) with a low tracking error.
QEP Global Core is an actively managed strategy that seeks to deliver modest incremental outperformance of MSCI World with limited index-relative risk. The team analyzes a global universe of over 15,000 companies to identify attractive opportunities, applying index-relative constraints at the stock, sector and regional level in order to ensure effective diversification, to manage risk and to avoid any extreme outcomes.
With a return target of +1% p.a. against the MSCI World Index and tracking error typically below 1.5% p.a., we would suggest that this strategy offers investors the benefits of index-based investing from a risk and cost perspective with the potential for relative performance upside.
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 distinct 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 and Financial Strength).
- We then use quantitative tools to ‘scale up’ our process, which allows us to access the best opportunities across a broad global universe. These tools 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 process can be summarized in three key stages:
1. Global Value and Quality Ranks
To maximize the potential investment opportunity, the team analyzes as broad a universe as possible – over 15,000 stocks (screened for liquidity) of all sizes across over 40 countries, including both developed and emerging markets. Each company is ranked by value (determined across a wide range of metrics including measures of dividends, cash flow, earnings, sales and assets) and quality (based on measures of profitability, stability and financial strength). 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.
2. Stock selection
Based on our fundamental analysis of value and quality, the team uses a decision tree approach to generate a probability of outperformance for each company within a given regional sector. Decision trees are designed to reflect the way in which an experienced investor might think, combining a series of independent decisions to produce an overall probability of success for stocks across a wide investment universe. Typically, a stock with a higher probability of success will take a weighting above that of the index and a stock with a lower probability of outperformance will be weighted below the index or, avoided altogether.
This approach is not widely used in the financial community, and we believe it provides us with a number of valuable competitive advantages. Firstly, each stock recommendation is clear and easy to understand being the result of a series of independent decisions. Secondly, our approach offers a more repeatable outcome as it avoids having to rely upon unrealistic statistical assumptions and is also adaptive to changing market conditions. Finally, our experience is that by encapsulating typical market behavior in our approach, a far richer array of stock recommendations can be captured, for example “the exception to the rule” in the case of value traps.
3. Portfolio Construction
Using index-relative constraints we carefully manage top-down risks which are inherently difficult to forecast and should not form part of a Core investment approach. We limit stock specific risk by usually investing in over 500 stocks. Constructing a portfolio which efficiently balances risks with rewards is the key responsibility of our portfolio managers. Within the risk constraints they overweight stocks with a higher probability of outperformance and underweight or avoid stocks with a lower probability. The team has built an impressive track record in the implementation of investment decisions and actively work to minimize the costs of trading.
- Core approach – offering the discipline of index investing with the potential for outperformance across most major environments.
- A fundamental basis – stock selection is driven primarily by value and quality based strategies.
- Robust and differentiated investment process – using an innovative “tree based” process based on how investors actually think rather than on traditional quantitative models fitted to past data.
- Sophisticated approach to risk – management of sector, style, stock and market direction risk fully integrated into the investment process.
- Low cost – active management at fee levels competitive with passive investing.
- Separate Accounts