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For professional investors or advisers only. Not for distribution. Tel Aviv Institutional Investment Conference 2012 There is a Solution Tim Matthews The.

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Presentation on theme: "For professional investors or advisers only. Not for distribution. Tel Aviv Institutional Investment Conference 2012 There is a Solution Tim Matthews The."— Presentation transcript:

1 For professional investors or advisers only. Not for distribution. Tel Aviv Institutional Investment Conference 2012 There is a Solution Tim Matthews The Illusion of Cheap Beta from ETFs March 2012 Senior Fund Manager, QEP Investment Team

2 Conventional Wisdom 1: Market Cap weighted index funds and ETFs are the safe route

3 2 The positives and negatives Market Cap weighted Index Funds (and Passive ETFs) Positives –Diversification – reduces the risk of single stock damaging your portfolio –Systematic – creates a repeatable and transparent investment –Fees for “index” solutions are typically lower – but what about ETFs? Negatives –Concentrated – excessive stock concentration in certain indices e.g. Vodafone, oil stocks –Lack of breadth – universe restriction limits opportunities e.g. Emerging Markets –Anti-Value – encourages investors to buy high and sell low e.g. Tech stocks

4 % Weight Japanese stock market bubble of the late 1980s Technology/Telecoms bubble of 1999/2000 % Weight Source: Schroders, MSCI 36% of MSCI World is comprised of tech stocks here 44% of MSCI World is comprised of Japanese stocks here Market Cap weights follow momentum Back the winners of yesterday and losers of tomorrow 3

5 Indices can restrict your investment universe Emerging markets Mid caps Small caps MSCI World –Typical indices like MSCI World only cover large cap stocks from developed markets –Significant opportunities from emerging markets, small and mid caps –We believe there is a global investible universe of 15,000 stocks compared with only 1,613 stocks in MSCI World Source: Schroders, MSCI. MSCI index constituents as at 31 st January 2012. Significant opportunities exist outside of the index 4

6 5 Exploiting every opportunity Source: Schroders, MSCI as at 31 st January 2012 All global stocks > 15,000 stocks > 50 countries MSCI AC World >2,400 stocks 45 countries MSCI World >1,600 stocks 24 countries MSCI Europe

7 Conventional Wisdom 2: Bigger is better

8 Benchmarks typically concentrated in big stocks Source: Schroders, MSCI. MSCI World as at 31 st January 2012 MSCI World by size Market Cap weighted indices will always be biased to the biggest stocks Big doesn’t mean better so why concentrate to mega/large cap stocks? Schroders global universe by number 7

9 8 Historically, mega caps have underperformed. From 1926 to 2004, if each year you had bought the 10 largest stocks in the S&P 500 you would have under-performed the market average by 3% pa for the next 10 years Underperformance of largest stocks Backing the largest stocks has underperformed Source: Robert D. Arnott. FAJ March/ April 2005 % pa Backing yesterday’s winners not necessarily a smart strategy

10 Challenging Conventional Wisdom in Global Equities Conventional wisdom –Follow benchmarks, go passive and use Cap weighted index funds or ETFs –Only concentrated portfolios give high conviction –Big stocks are better Our approach – Embrace breadth – Be unconstrained – Systematically rebalance – Diversification can increase returns (not reduce them!) – Focus on Value and Quality 9

11 10 The pros and cons of market cap-weight index solutions revisited Alternatives to Passive Passive IndexAlternative Solution Pros –Diversification YesYes –Systematic & TransparentYesYes –Low management feesYesYes (if fee is justifiable) Cons –ConcentrationNo (too concentrated)Yes (reduced concentration) –Breadth No (limited breadth)Yes (maximise opportunity) –Return DriversNo (buy high, sell low)Yes (clear investment rationale)

12 11 The Alternative Solution A strategic approach to investing 1.Start with the fundamentals: Quality of business and stock valuations 2.Quant advantage: Portfolio construction maximises the opportunity across a global universe of over 15,000 stocks 3.Decisions taken by the Portfolio Manager: Emphasis on understanding the current environment & forward-looking research

13 12 Source: Schroders. Schroder QEP Global Core composite compared with MSCI World NDR. Past performance is no guarantee of future results.. * since inception 31 January 2000. –Performance needs to be repeatable –Needs to work in different market environments So does this work in practice? An enhanced-index approach as an example Relative Performance – Gross of Fees in USD Since inception* Relative Return = +1.3% p.a. Tracking Error = 1.1% Information Ratio = 1.2

14 13 Performance Since Inception (%) How does it look over the longer term? Compounding of returns adds value to the long-term investor Source: Schroders. Schroder QEP Global Core Composite compared with MSCI World NDR in USD from 31 January 2000 to 30 December 2011. Assumes TER of 51bps. –Lower performance target e.g. Index +1% pa –Limited index-relative risk –A commensurate fee

15 14 Source: Bloomberg as at 29 th February 2012 with total returns in USD net of fees. Schroder ISF Global Core C Share Class (BB ticker: SCHGLEC) – TER 51bps. Fund inception date: 30 th September 2001. iShares MSCI World (BB ticker: IDWR) – TER 50bps, Lyxor ETF MSCI World (BB ticker: LYWLD) – TER 45bps …with index plus rather than index minus performance A Superior Alternative to ETFs

16 15 Rebalancing versus momentum What are the key return drivers? –Contra-trading against market fads (e.g. rebalancing) –Need an anchor that is not price sensitive –This anchor can be anything measurable (equal weighting or even the length of a company’s name) –How do we define Value? Dividends, Cash, Earnings, Sales & Assets Source: Schroders, Worldscope, QEP. The Equally weighted index and “Length of company name” indices were both calculated using the same universe as the Fundamental Index (simulated by QEP) Developed 1000 index and rebalanced in March of each year with stocks either weighted equally or weighted by the length of the company name (companies with longer names were assigned higher weights). All returns are local (gross). Cumulative return

17 16 Monthly win rate higher in times of market stress What are the key return drivers? Quality performs when risk aversion is rising –An alternative approach to value investing –Quality is ‘Growth style’ investing without the return drag associated with purchasing glamour stocks –How do we define it? Profitability, Stability, Financial Strength 55% 0% 25% 50% 75% 100% 49% Up Markets 82% Down Markets 61% Volatile Markets 55% Stable Markets Source: Schroders, QEP. Live performance has been included from November 2007 to October 2010 onwards prior to this simulated results are shown back to 1988. They are the result of quantitative back-testing which are based on a number of assumptions. There are a number of limitations on the retroactive reconstruction of any performance results based on simulations and simulated results must be considered as no more than approximate representation of the strategy’s potential performance.

18 Source: MSCI, Schroders as at 31 st January 2012. Cumulative and annualised returns, calculated net of fees, USD. Benchmark is MSCI World Net Dividends Reinvested QEP Global Equity Funds Returns of QEP Global Equity Funds versus index and ETF A proven track record 17

19 1.Highly Fee-Sensitive Clients with a preference for the Index QEP Global Core –Incremental, repeatable returns compound over time to be significant 2.Longer Horizon Investors Looking to Harvest the Equity Risk PremiumQEP Global Value –Unconstrained strategies offer higher relative returns to those willing to step away from the index 3.Risk-Averse Equity Investors with a Shorter Investment HorizonQEP Global Quality –Quality strategies work well in distressed markets which is often when pension fund investors are most interested in their investments Summary A range of solutions for different types of client 18 The QEP Investment Team has over US$ 20bn of assets under management Majority of clients are sophisticated institutional investors who have discovered there is an alternative way to invest in Global Equities Source: Schroders as at 30 th September 2011

20 19 This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or contains additional disclaimers which apply to the third party data. Schroders has expressed its own views in this presentation and these may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored. Important Information

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