QEP International Value
The QEP International Value strategy seeks long-term capital appreciation.
Schroder QEP International Value is an active, index-unconstrained, value-based strategy designed to deliver higher long-run returns. Analyzing a universe of over 12,000 stocks, the team uses a bottom-up process to construct a highly diversified portfolio of over 500 stocks. QEP International Value offers investors the potential to generate higher long-term returns with significantly reduced stock specific risk.
QEP International Value targets gross returns of +3% above international indices such as the MSCI ACWI ex US** over the full economic cycle.
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.
Stage 1. Global Value Rank
We invest from the broadest possible international universe of stocks while screening for sufficient liquidity to trade without undue market impact. We analyze the fundamentals of 12,000 companies every day from both developed and emerging markets and rank them in terms of their value. The value of a company is determined across measures of dividends, cashflow, earnings sales and assets. This rank is re-calculated on a daily basis in order to ensure that the latest information is incorporated e.g. price movements and company fundamentals.
Stage 2. Stock Selection
We select stocks from the cheapest third of our Value Rank. In deciding how much of each stock to own, we believe that focusing on company quality allows us to avoid ‘value traps’, stocks which are cheap for good reasons. We capture quality through an assessment of profitability, stability and financial strength, as well as specialized balance sheet measures for financial companies. In addition, we incorporate market-based factors, such as the output of a decision-tree designed to identify each stock’s probability of value being realized. Other considerations in scaling position sizes include measures of risk and also the liquidity and volatility of the stock (i.e. the likely market impact of trading it).
Stage 3. Portfolio Construction
Constructing a portfolio which efficiently balances risks with rewards is the key responsibility of our portfolio managers. They ensure diversification across regions, sectors, market capitalizations and investment themes. Portfolio construction is driven by bottom-up stock selection decisions made on the basis of our evaluation of a company’s valuation, quality and other factors as described above; this process is not influenced by benchmark weights. We limit stock specific risk by usually investing in over 500 stocks and the maximum position size for any individual stock is 0.75%. The team has built an impressive track record in the implementation of investment decisions and actively work to minimize the costs of trading.
1. Invest in a truly diversified portfolio of value opportunities
Purchasing companies on the basis of valuations has been a successful investment strategy that has historically generated some of the best returns for equity investors, particularly over longer holding periods. We believe that a value-based approach should be a mandatory component of any long-term strategic equity allocation.
We rank stocks on a daily basis across multiple valuation criteria to build a diversified portfolio of over 500 stocks. This level of diversification not only means that investors are exposed to a broader range of potential return-boosting opportunities but are also protected from the risk that the failure of a single investment could cause material damage to the overall portfolio.
2.Weight stocks based on fundamentals, not company size
We believe that the decision on how much an investor should own of any given stock is just as important as selecting the stocks in the first place. Within the context of a value-based investment process in particular, we believe that investors should break the link with capitalization within the stock weighting and selection process and replace it with a weighting scheme that favors the underlying company fundamentals and liquidity. Attractively priced stocks with good quality attributes (e.g. higher profitability or balance sheet strength) are allocated higher weights (up to 0.75%) while stocks with a higher degree of uncertainty (e.g. lower profitability or less liquidity) are allocated much smaller weights (typically 0.05%) to reflect their higher risk/return characteristics. We have also found that the inclusion of small and mid-cap stocks have significantly boosted investment returns over time.
3. Look beyond the index to maximize the opportunity
A globally unconstrained approach provides the crucial final step to higher long-term returns. We track a global universe of over 12,000 stocks to maximize the investment opportunity – in a world of low returns, missing good opportunities can be just as damaging as investing in bad ones. By taking an unconstrained approach, Global ex-US Value has held a long-standing allocation to Emerging Markets – just one example of how looking beyond benchmarks can boost returns. Additionally, this approach means that an allocation to a given sector or country is not forced just because they are heavily weighted within the index.