QEP Investment Team, shed lights on topics such as their team structure, how various risks have affected their investment decisions, and the major portfolio changes over last year.
Category Winner: Best Global Equity Fund - Schroder ISF QEP Global Quality A
Key Stats
Inception Date: 2007 Oct 17
Morningstar Rating (as of 2015-03-31): 
Total Net Assets (Mil, as of 2015-03-31): 1,759.23 USD
Manager: Justin Abercrombie
Manager Start Date: 2007 Oct 17
M: Morningstar S: QEP Investment Team
M: Could you highlight any major changes you made to the portfolio over the course of 2014? Were there any particular holding that drove the fund’s performance for the year?
S: The Schroder ISF Global Quality ended the year ahead of the MSCI World index, with a low allocation to underperforming Continental Europe being a positive contributor as nervousness towards the region persisted. Here the strategy benefited from avoiding low quality banks and also from a low weight to industrials stocks, which have remained unattractive and out-of-favour for much of the year. Stock selection was also positive within healthcare (partly thanks to renewed M&A activity amongst pharmaceuticals at the start of year and in equipment companies where we have a long-held preference) and telecoms (in Asia especially).
Partially offsetting this, the market’s return to growth themes in November was the main detractor from performance, with the strategy suffering from its lower allocation to more expensive consumer stocks in the US. A re-emergence of the ‘yield trade’ also impacted negatively, with the market rewarding already expensive US REITs and utilities. In a year where the US dollar appreciated considerably against all major currencies, the strategy’s exposure to Emerging Markets was a drag on performance vs the MSCI World, as even the high quality stocks to which the strategy has exposure suffered. Against the MSCI AC World the impact from Emerging Markets was positive, largely due to our complete avoidance of Brazilian resources.
M: What is your economic outlook for 2015 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
S: In defensive sectors, we retain our preference for pharmaceutical and healthcare equipment stocks but have been steadily reducing positions after recent gains. Within consumer staples, we typically find food & drink companies expensive, and see more opportunities in home and personal products companies. Our low allocation to utilities is a result of a zero weighting in US utilities which remain unattractive due to the ‘reach for yield’ trade.
Our position in technology is at the higher end of the historic range. We have continued to hold positions across a broad range of opportunities including a number of overlooked but attractively-valued ‘mature’ technology stocks, rather than glamorous software stocks. Elsewhere in the cyclical sectors we have a preference for US and UK industrials. Within autos, the strategy retains a preference for Emerging Market stocks and for auto component makers over the larger car manufacturers.
In financials our biggest exposure remains to insurance, both life & health and property & casualty. Real estate remains unattractive overall, especially in the US where we have little exposure.
In Emerging Markets we have a broad exposure with the exception of financials, due to a near zero weighting in Chinese and Brazilian banks. Within defensives we have a preference for utilities and telecoms in Emerging Asia and EMEA. We also find opportunities amongst Asian semiconductor manufacturers.
M: Can you comment on the macro risks facing the global economy, including potential US rate hikes, QE programs in the Eurozone and Japan, and the growth headwinds facing the emerging world? How do these risks affect your investment decisions?
S: It’s still hard to argue that the US market is cheap as it is valued on 18.8x 2015 earnings. At the beginning of the year, investors had priced in fewer threats to the US economy than elsewhere, with employment data constructive and the boost that lower oil prices were likely to give an economy dominated by the consumer. While cuts to forecast earnings in commodity sectors ahead of earnings season were unsurprising, all sectors saw estimates reduced versus expectations at the beginning of January, even though earnings season itself has seen most companies beat the recently reduced expectations.
US complex banks offer a more balanced risk-reward profile than their European competitors, albeit demanding a small premium to tangible book without yet offering significant dividends. Compared to the over-priced simple banks in the US, the complex banks still offer opportunities. Real estate equities in Hong Kong trade at a significant discount to book value despite having reasonably strong balance sheets. Insurance, particularly US property & casualty, still offers opportunities.
The cumulative underperformance of the emerging markets compared to the developed markets since they peaked at the end of 2010 is more than 50%. Emerging market equities currently trade at more than a 30% discount to those in the developed markets on a price-to-book basis, a level not seen for over ten years. Using price-to-earnings multiples the discount is similar, with the valuation case most convincing for Asia and EMEA.
Commodity producers have suffered substantial falls in earnings estimates reflecting excess supply and disappointing demand. With this as the background, best-in-class low cost, diversified producers have been heavily discounted and on a price-to-book basis are now in one of the cheapest deciles of their historical valuation range.
M: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?
S: The QEP Investment Team consists of 30 members, located in London, Sydney and New York. It is led by Justin Abercrombie, supported by David Philpotts (Head of Research), Stuart Adrian (Senior Analyst & Portfolio Manager) and Stephen Langford (Senior Analyst & Portfolio Manager).
The team is organised across three key functions. The portfolio implementation team is based in London and is responsible for the day-to-day management of client portfolios. The research team is principally located in London with additional small teams in Sydney and New York, and its members are responsible for researching new investment strategies and enhancing existing models. A product management team located in London and key international offices oversees all aspects of client service and marketing. Additionally, the QEP Investment Team utilises Schroders’ global resources for Trading, IT, Risk and Compliance.
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