QEP Global Quality
QEP Global Quality targets a long-run return of +3% per annum (gross of fees) above global indices such as the MSCI All Country World Index** (net dividends reinvested) over a full economic cycle.
QEP Global Quality is an active, index-unconstrained strategy seeking to deliver higher long-run returns with lower risk than the wider market. Analyzing a universe of over 5,000 stocks, the team uses a bottom-up process to construct a highly diversified portfolio of over 400 stocks.
QEP Global Quality aims to offer investors a more stable form of growth investing, focused on trying to identify companies with high quality attributes while avoiding thematic stocks which we believe carry a higher risk of disappointment.
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 Quality Rank
We invest from the broadest possible global universe of stocks while screening for sufficient liquidity to trade without undue market impact. We analyze the fundamentals of 5,000 companies every day from both developed and emerging markets and rank them in terms of their quality. Quality is assessed using measures of profitability, stability and financial strength, as well as specialized balance sheet measures for financial companies. 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 top third of our Quality Rank. In deciding how much of each stock to own, we believe that focusing on company valuations allows us to avoid over-paying for Quality where we do not think the price is justified by fundamentals. We seek to capture Value by looking at a range of metrics based on earnings, cashflow and assets in addition to dividend yields. In addition, we incorporate market-based factors, such as the output of a decisiontree designed to identify stocks at high risk of significantly disappointing, an event which we refer to as a “torpedo”. 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 quality, valuation and other factors as described above; this process is not influenced by benchmark weights. We limit stock specific risk by usually investing in over 400 stocks and the maximum position size for any individual security 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.
- Capturing the long-term ‘quality premium’
Our research suggests that companies with high quality characteristics tend to deliver higher returns over the long-term. We analyze factors such as profit margins, the growth of dividends through time, earnings and sales to identify companies with a combination of the three key quality attributes: profitability, stability and financial strength.
- A tendency to outperform in periods of rising risk aversion
Quality companies have tended to outperform particularly strongly in stressful market environments and when risk aversion is rising – environments when other long-run strategies can struggle to add value. We believe these companies are also less likely to experience the type of events which can seriously damage share prices such as cuts to dividends or large scale financial losses. By avoiding companies which we believe are more susceptible to dramatic price shocks, we think the strategy offers investors a more stable and consistent experience of growth investing. Win rate analysis indicates that the strategy has outperformed 90% of the time when markets are falling and at least 50% of the time when markets are rising.
- Accessing quality companies globally
A globally unconstrained approach provides the crucial final step in our attempt to seek higher long-term returns. We track a global universe of 5,000 companies with market capitalizations of over $1 billion to maximize the investment opportunity. We then invest in a portfolio of over 400 stocks, offering investors exposure to a broad range of potential opportunities – across multiple regions, sectors and themes – with the additional benefit of significantly reduced stock-specific risk.
Region and sector weightings are determined from the bottom-up – as such, we are not forced to allocate to any given sector or country just because it is heavily weighted within an index, an approach which can cost investors in the long-run. The strategy is also able to benefit from the exciting opportunities offered by emerging markets.
- Separate Accounts
- Commingled Vehicle