Schroder QEP Global Quality
Strategy Fact Sheet – 4Q16
Strategy overview
Team highlights
The Schroder QEP Global Quality strategy aims to offer a more
stable alternative to traditional growth approaches. We focus on
companies that offer stable growth, are profitable and are financially
strong. The strategy invests in very different stocks compared to
those associated with value-oriented approaches, potentially offering
strategic diversification benefits for investors looking to construct a
more balanced equity portfolio. QEP Global Quality seeks to deliver
a long-term return of +3% p.a.† (gross of fees) above the MSCI AC
World or comparable index.
– Over 16 years track record in managing global equity portfolios
– Team manages over $41 billion* in assets
– Investment philosophy is based upon combining fundamental
data and well-researched behavioral insights
– Considerable emphasis is placed upon portfolio construction and
genuine diversification of risk
*As of September 30, 2016
†
There can be no guarantee that any investor objectives or outcomes will be achieved.
Key features
1. Seeks higher risk-adjusted returns: Our research has found that Quality companies (as defined by measures of profitability, stability and
financial strength) tend to outperform in the long run. While the strategy is designed to outperform across a broad range of market environments,
it tends to perform particularly well at times of market uncertainty or heightened risk aversion. As such, it aims to deliver higher returns through
time, but with a typically lower level of volatility than the broader market.
2. Conviction without concentrated stock risk: Seeking higher returns can be associated with greater risk, as this is often achieved through a
very concentrated stock portfolio. We seek to reduce stock risk by building a highly diversified portfolio but with no less conviction; the portfolio
typically holds at least 400 stocks.
3. Stock weights determined by fundamentals, not market cap: Our approach is to weight stocks based upon their fundamentals and
liquidity. This is more balanced and reduces the return drag typically associated with the inefficiency of market-cap weighting.
4. Bottom-up, index-unconstrained investing for more efficiency: We maximize our investment opportunities by systematically analyzing
over 5,000 global stocks every day. We do not impose any index-based sector or region constraints, enabling us to invest wherever we find the
best opportunities. Our portfolio construction tools allow us to manage the risk-return trade-off efficiently.
Composite performance
As of December 31, 2016
*Inception October 31, 2007
25%
Schroder QEP Global Quality (Gross)
Schroder QEP Global Quality (Net)
MSCI AC World Index†
20%
†MSCI ACWI captures large
and mid cap representation
across 23 Developed
Markets and 23 Emerging
Markets countries. With
2,486 constituents, the index
covers approximately 85% of
the global investable equity
opportunity set.
15%
10.85
10%
8.57
6.96
7.86
8.57
9.21 9.36
6.96 7.86
4.82
5%
4.82
3.27
3.27 3.13
0.96 0.58 1.19
0%
5 yr
2.02
QTR
YTD
1 yr
3 yr
Difference (Gross)
-0.23%
+0.71%
+0.71%
+1.69%
+1.49%
Annual S.I.*
+2.80%
Difference (Net)
-0.61%
-0.90%
-0.90%
+0.14%
-0.15%
+1.25%
2015
2014
2013
2012
2011
0.05%
6.02%
25.23%
16.03%
-4.46%
Net
-1.42%
4.46%
23.38%
14.31%
-5.87%
MSCI AC World Index
-2.36%
4.16%
22.80%
16.13%
-7.35%
Difference (Gross)
+2.42%
+1.86%
+2.43%
-0.10%
+2.89%
Difference (Net)
+0.94%
+0.29%
+0.58%
-1.82%
+1.48%
Gross
Past performance is not a guide to future performance. The value of an investment can go down as well as up and is not guaranteed. Please refer to the disclosures at the end of the
document for important information about the composite. Performance for periods greater than 1 year is annualized.
All data and statistics as of December 31, 2016.
Schroder QEP Global Quality
Size allocation (%)
Regional allocation (%)
49.6
Mega (>$20bn)
52.8
57.1
North America
72.4
Large ($5bn-$20bn)
18.2
Mid ($1bn-$5bn)
16.8
14.8
Cont Europe
30.2
24.0
United Kingdom
7.2
5.9
Japan
7.2
7.8
3.6
5.6
3.9
Pacific ex Japan
1.0
Small ($250m-$1bn)
0.0
0.0
Micro (<$250m)
Emerging Markets EMEA
2.0
1.7
Emerging Markets LATAM
0.5
1.4
Schroder QEP Global Quality
MSCI AC World Index
1.0
0.0
Cash
6.9
7.4
Emerging Markets Asia
0.0
20
40
60
80
MSCI AC World Index
1.0
0.0
Cash
0
Schroder QEP Global Quality
0
15
30
45
Source: Schroders, MSCI as of December 31, 2016.
Source: Schroders, MSCI as of December 31, 2016.
Sector allocation (%)
Portfolio characteristics
Health Care
18.9
11.0
Information Technology
Consumer Staples
Consumer Discretionary
Industrials
8.4
Insurers/Asset Mgt
Telecommunication Svcs
3.7
Banks
Materials
3.1
Energy
Real Estate
Utilities
1.2
0.4
1.0
Cash 0.0
0
12.3
9.5
10.7
12.5
10.3
10.3
6.4
5.6
5.5
15.4
Active share1
17.9
Total Weight of non-index stocks
Tracking Error (annualized since inception)
Number of stocks
Price to book4
MSCI AC World Index
3.2
10
15
20
25
Source: Schroders, MSCI as of December 31, 2016. Sectors/regions/market caps listed
are shown for illustrative purposes and are not to be considered a recommendation to
buy or sell.
3.06%
399
Weighted Average Market Cap ($m)
Schroder QEP Global
Quality
7.4
3.2
5
20.0%
2
12.1
75
75.3%
3
4.7
5.2
60
65,872
2.90
Price to earnings5
17.38
Return on equity6
24.50
Source: Schroders, MSCI as of December 31, 2016. Tracking error is based on
the composite for this strategy, the inception date of which is October 31, 2007.
Characteristics are vs. MSCI AC World Index.
1. Measures the percentage amount the portfolio differs from the benchmark. A reading of 0% suggests holdings are identical to the benchmark. 2. The annualized standard
deviation of the active returns of a portfolio relative to the benchmark. 3. An average that takes into account the proportional relevance of each component, rather than treating each
component equally. Market cap is the market price of an entire company on any given day, calculated by multiplying the number of shares outstanding by the price per share. 4. A
ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share. 5. The
sum of a company’s price-to-earnings, calculated by taking the current stock price and dividing it by the trailing earnings per share for the past 12 months. 6. The amount of net
income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money
shareholders have invested.
Top ten holdings
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Novartis AG
Nestle SA
Johnson & Johnson
Amgen Inc
Novo-Nordisk AS
Pfizer Inc
Roche Hldgs AG
Astellas Pharma
Cisco Systems Inc
Taiwan Semiconductor Manufacturing Company
Total
Country % of Total Market Value
Switzerland
0.83
Switzerland
0.81
United States
0.80
United States
0.80
Denmark
0.79
United States
0.78
Switzerland
0.77
Japan
0.77
United States
0.77
Taiwan
0.76
7.88
Source: Schroders, as of December 31, 2016.
Securities listed (excluding cash and cash equivalents) are shown for illustrative purposes and not to be considered a recommendation to buy or sell. The top ten holdings
are based on a representative account. Cash and cash equivalents are excluded from the calculations. These holdings are subject to change and should not be viewed as an
investment recommendation. It should not be assumed that any of these holdings were or will be profitable.
Schroder QEP Global Quality
Quarterly Commentary
Market Review
In a dramatic start to the year, equity markets plunged over the first
six weeks of 2016. At that time, perhaps few would have predicted
that global indices would end the year with a healthy gain.
The initial falls were prompted by concerns about the strength of
the global economy and turmoil in China, but when investors took
fright policymakers marched to the rescue. Dovish central banks
underscored a big rebound in commodity prices and firmer oil prices
played a significant role in boosting sentiment. Economic worries
also receded as the year went on and, although episodes of volatility
recurred, essentially the rally in equities and commodities that began
in February continued until the end of 2016. This was despite the
shocks of the UK’s vote to leave the EU and of Donald Trump’s victory
in the US presidential election. Indeed the latter actually underpinned
a further rally, especially in the sections of the economy that stand to
benefit if his proposed policies are carried out.
The surprise November US election outcome resulted in a significant
market rotation in Q4. To some extent markets were already starting
to rotate even before Trump was elected, with value stocks (such as
resources and emerging markets) already bottoming earlier this year.
After lagging for several years, value was the best-performing of the
major MSCI style indices in 2016, with most of the outperformance
coming in Q4. Since the US election financials, especially banks,
have benefited from the perception that Trump’s victory may mean
less regulation, a stronger economy and a steeper yield curve.
Industrials and materials stocks also rallied in the hope of higher
economic growth and infrastructure spending.
On the flip side, the rotation marked some long-overdue mean
reversion for the overextended trends of the last five years, which
had become expensive: crowded trades. Some of the big “new
economy” winners of the last few years, such as Amazon and
Facebook, have been underperforming as investors discount
the potential for some of the benefits of globalisation to reverse.
High-yielding bond substitutes were also overextended and the
previously high-flying minimum volatility style underperformed in the
fourth quarter and ended the year slightly behind the global index.
Thus defensive sectors tended to languish at the bottom of the
performance table for the year. As is always the case at inflection
points, momentum as a style also performed poorly over the year.
Performance and Strategy
The Schroder QEP Global Quality strategy underperformed its
reference index. The majority of this was accounted for by our
holdings in defensive sectors – telecoms, staples and healthcare –
which were dragged down in a rather undiscerning sell-off where
investors paid scant regard to their attractiveness on either quality or
valuation. The strategy’s modest weight in resources sectors also
held back relative performance. The financials sector overall was
neutral for relative performance: many of our US holdings did well,
especially banks and insurers, but this was counterbalanced by not
owning the deep value, lower quality financials across the globe that
also rallied strongly into the close of the year. As the market’s style
rotation accelerated in Q4, our low allocation to utilities and real estate
contributed positively.
Outlook and Positioning
The strategy maintains a high exposure to all defensive sectors
except utilities. Our low allocation to utilities is a result of a
zero weighting in developed markets, a long-standing and high
conviction stance. We retain our overall preference for healthcare
stocks across all regions globally, particularly pharmaceuticals and
healthcare providers. In telecoms, we view stocks in Asia Pacific and
emerging markets as the most attractive opportunities from a quality
perspective. Our exposure to consumer staples is spread broadly
across the different industries. With defensives selling off at the end
of last year, somewhat indiscriminately in our view, we took advantage
of some compelling valuations to add to selected stocks, particularly
within the consumer staples and healthcare sectors.
Exposure to cyclical sectors remains broad-based and global. In
the industrials sector, we have trimmed a large number of positions
where valuations are no longer compelling after recent strong returns,
particularly in the US.
The strategy’s exposure to financials remains focused on high quality
companies that offer good value and high-and-sustainable dividend
yields. Life & health insurers offer the most attractive opportunities
and we have exposure to a wide range of such stocks globally. We
have taken further profits in high quality US simple banks where
valuations are not as compelling as they were. We continue to be
cautious on most European banks where we see considerable risks
ahead and have only very selective exposure to the few high quality
stocks in the region.
In emerging markets we have a broad exposure with the exception of
financials, due to a zero weighting in Chinese banks. In country terms
we continue to favour South Africa and Taiwan. Among defensives
we have a preference for telecoms in Emerging Asia and EMEA.
Source: Schroders.
Important Information: Schroders is a global asset management company with $487.1 billion under management as of September 30, 2016. Our clients are major financial
institutions including banks and insurance companies, public and private pension funds, endowments and foundations, high net worth individuals, financial intermediaries and
retail investors. Our aim is to apply our specialist asset management skills in serving the needs of our clients worldwide and in delivering value to our shareholders. With one of the
largest networks of offices of any dedicated asset management company and over 700 investment professionals covering the world’s investment markets, we offer our clients a
comprehensive range of products and services. Further information about Schroders can be found at www.schroders.com/us. This document is designed to describe an investment
strategy generally and does not constitute an offer to sell any investment vehicle, security or instrument. The information and opinions contained in this document have been obtained
from sources we consider to be reliable. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information
in the document when making individual investment and/or strategic decisions. Schroders has expressed its own views and opinions in this document and these may change.
Countries mentioned are shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Diversification does not assure a profit or protect against
loss in a declining market. Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed. No managed account
can guarantee that it will achieve its return objective. Portfolio characteristics, such as stock weighting, may vary among accounts managed within the same strategy. This document
does not purport to provide investment advice and the information contained in this newsletter is for informational purposes and not to engage in trading activities. It does not purport
to describe the business or affairs of any issuer and is not being provided for delivery to or review by any prospective purchaser so as to assist the prospective purchaser to make an
investment decision in respect of securities being sold in a distribution. Schroder Investment Management North America Inc. (“SIMNA Inc.”) is an indirect, wholly owned subsidiary of
Schroders plc, is an investment adviser registered with the U.S. SEC and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British
Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan. It provides asset management products and services to clients in the U.S. and Canada including Schroder
Capital Funds (Delaware), Schroder Series Trust and Schroder Global Series Trust, investment companies registered with the SEC (the “Schroder Funds”). Shares of the Schroder
Funds are distributed by Schroder Fund Advisors LLC, a member of FINRA. SIMNA Inc. and Schroder Fund Advisors LLC are indirect, wholly-owned subsidiaries of Schroders plc,
a UK public company with shares listed on the London Stock Exchange. Schroder Investment Management North America Inc. 875 Third Avenue, New York, NY 10022-6225, (212)
641-3800, www.schroders.com/us.
Schroder QEP Global Quality
Risk
All investments, domestic and foreign, involve risks including the risk of possible loss of principal. The market value of the portfolio may
decline as a result of a number of factors, including adverse economic and market conditions, prospects of stocks in the portfolio, changing
interest rates, and real or perceived adverse competitive industry conditions. Investing overseas involves special risks including among
others, risks related to political or economic instability, foreign currency (such as exchange, valuation, and fluctuation) risk, market entry
or exit restrictions, illiquidity and taxation. These risks exist to a greater extent in emerging markets than they do in developed markets.
Investments in small capitalization companies generally carry greater risk than is customarily associated with larger capitalization companies,
which may include, for example, less public information, more limited financial resources and product lines, greater volatility, higher risk of
failure than larger companies, and less liquidity.
Schrider QEP Global Quality
As of: December 31, 2015
Definition of the Firm: The Firm is defined as all accounts managed by Schroder Investment Management in the UK and US, by wholly owned subsidiaries of Schroders PLC. Prior
to January 1, 2007 SIM London & SIM North America existed as two separate Firms which were compliant & verified as separate entities until December 31, 2006. The consolidation
of these two Firms was made as part of a move towards creating one global Firm. Composite and Firm assets reported prior to January 1, 2007 represent those of the legacy firm
which managed the product. Prior to January 1, 2011 the SPrIM (Schroder Property Investment Management) Firm existed separate to the Schroder Investment Management UK
and US Firm, from January 1, 2011 these Firms have been combined into a single firm. On April 2, 2013, Schroder U.S. Holdings Inc., a subsidiary of Schroders plc, purchased STW
Fixed Income Management LLC (“STW”) and on July 2, 2013, Schroders plc, purchased Cazenove Capital Holdings; assets managed by STW and Cazenove are included in the Firm
from January 1, 2014. Assets Managed against a liability driven mandate are excluded from the GIPS Firm. A complete list and description of the Firm’s composites and performance
results is available upon request.
Composite Definition: The QEP – Global Quality Composite (the “Composite”) is comprised of all Schroder Investment Management (UK & US), fully discretionary accounts that are
managed in a similar manner and seek to achieve a total return above the MSCI AC World (NDR), MSCI World (NDR) or comparable index through active investment in diversified,
index-unconstrained, Quality style-biased portfolios. Composite accounts invest predominantly in equities and equity-related securities, although other financial instruments are
permitted. Derivatives may be used to achieve the investment objective and to reduce risk or manage the fund more efficiently. None of these accounts use leverage.
This description was redefined on 11/29/2012, the redefinition has been made to enhance the composite description by increasing the level of detail used to describe the investment
strategy. Previous disclosures are available upon request. As of November 2013 the primary benchmark for this composite was changed from MSCI World (NDR) to the MSCI AC
World (NDR) for all periods since inception. The latter is a more appropriate comparison for the strategy, as emerging markets are typically included in the investment universe. No
change was made to the investment process and the benchmark continues to be used only as a reference for performance comparison.
Composite Construction: New accounts are included from the beginning of the first full month of management on a discretionary basis. Terminated accounts are excluded from the
end of the last full month of discretionary management. This Composite has no minimum asset level for inclusion.
The composite currency is US Dollar
Composite Inception Date: 10-31-2007
Composite Creation Date: 02-01-2008
Calculation Methodology: The portfolio returns are time-weighted rates of return that are adjusted for cash flows. Portfolio returns are combined using beginning of period asset
weights to produce the composite return. Periodic returns are geometrically linked to produce annual returns. Dividends on equities are recognized net of irrecoverable withholding
tax. Since January 1999 dividends have been recognized as of the ex-dividend date having previously been recognized on a cash basis. Performance results are presented before
the deduction of management fees and custodian fees but after trading expenses.
Fee Calculation: Net of fees composite returns are prepared by deducting a model fee based on the highest retail management fee of 1.5%. Actual fees paid by institutional accounts
in the composite were less than this amount.
Dispersion: The dispersion of annual returns is measured by the asset weighted standard deviation of portfolio returns represented within the composite for the full year provided a
minimum of 5 portfolios are available.
Additional Information: The exchange rates used are provided by WM. Each currency is valued at 4 pm on the last business day of the month. Additional information regarding
policies for valuing portfolios, calculating and reporting returns and a description of all composites are available on request.
GIPS Compliance and Verification: Schroder Investment Management (UK & US) claims compliance with the Global Investment Performance Standards GIPS® and has prepared
and presented this report in compliance with the GIPS standards. Schroder Investment Management (UK & US) has been independently verified for the periods January 1, 1996 to
December 31, 2015.
Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and
procedures are designed to calculate and present performance in compliance with the GIPS standards. The QEP – Global Quality (the “composite”) has been examined for the periods
January 1, 2011 to December 31, 2015. The verification and performance examination reports are available upon request.
Composite: QEP - Global Quality
Primary Benchmark: MSCI AC World (NDR)
Secondary Benchmark: MSCI World (NDR)
Currency: USD
Gross Returns as of: December 31, 2015
Composite Inception Date: October 31, 2007
Year
2015
2014
2013
2012
2011
2010
2009
2008
2007*
Gross Composite
Return
0.05%
6.02%
25.23%
16.03%
-4.46%
18.02%
34.93%
-38.54%
-1.62%
Net Composite
Return
-1.42%
4.46%
23.38%
14.31%
-5.87%
16.28%
32.94%
-39.45%
-1.87%
As of Dec 2015
Annualized 3 Year
Annualized 5 Year
Annualized 7 Year
Annualized 10 Year
Annualized S.I.3
Gross Composite
Return
9.93%
8.05%
12.95%
N/A
4.37%
Net Composite
Return
8.31%
6.45%
11.28%
N/A
2.83%
Primary
Benchmark
Return
-2.36%
4.16%
22.80%
16.13%
-7.35%
12.67%
34.62%
-42.20%
-5.48%
Primary
Benchmark
Return
7.69%
6.09%
10.71%
N/A
1.33%
3 Year
Composite Risk 3 Year Primary 3 Year Secondary
Secondary
1
Benchmark Risk1 Benchmark Risk1
Benchmark Return
-0.87%
10.22%
10.94%
10.96%
4.94%
10.36%
10.64%
10.37%
26.68%
14.05%
14.14%
13.73%
15.83%
16.48%
17.37%
16.98%
-5.54%
18.56%
20.88%
20.44%
11.76%
22.35%
24.84%
24.05%
29.99%
N/A
N/A
N/A
-40.71%
N/A
N/A
N/A
-5.32%
N/A
N/A
N/A
Secondary
Benchmark Return
9.63%
7.59%
11.14%
N/A
2.00%
Composite
Risk1
10.22%
12.71%
14.60%
N/A
16.73%
Number of
Portfolios
(throughout
period)
12 (11)
13 (11)
11 (9)
10 (6)
7 (6)
6 (4)
<5
<5
<5
Account
Dispersion2
0.75%
0.51%
1.18%
0.28%
0.34%
N/A
N/A
N/A
N/A
Market Value at
end of Period
8,160,338,943
8,972,369,919
8,235,006,242
7,602,919,092
5,514,535,045
4,898,645,521
1,793,292,208
737,394,279
60,207,265
Primary
Secondary
Benchmark Risk1 Benchmark Risk1
10.94%
10.96%
13.06%
12.79%
16.11%
15.79%
N/A
N/A
18.18%
17.69%
Fee Schedule
Net of fees composite returns are prepared by deducting a model fee based on the highest retail management fee of 1.5%. Actual fees paid by institutional accounts in the composite were less than this amount.
1 Annualized standard deviation of gross monthly returns for the composite and monthly returns for the benchmark
2 Asset weighted standard deviation of annual gross returns of accounts that have been in the composite for the entire year
3 Since Inception October 31, 2007
4 Since Dec 31, 2003 Total Firm Assets include non-fee paying accounts. 2003 Total Firm Assets value has been restated due to the inclusion of those non-fee paying accounts.
Total Firm Assets from 2007 incorporate the UK & US firm merger as detailed in the Definition of the Firm, from the start of 2011 Schroder Property Investment Management Multi
Manager accounts are included in the Total Firm Assets
* Returns are for a part period year
N/A - Information is not statistically meaningful due to an insufficient number of portfolios for the entire year
Source: Schroders
PFS-QEPGLQUAL
Average Account
Value at end of
Period
680,028,245
690,182,301
748,636,931
760,291,909
787,790,721
816,440,920
448,323,052
245,798,093
60,207,265
Percentage of
Firm Assets
2.78%
3.17%
3.22%
3.40%
2.83%
2.41%
1.11%
0.82%
0.04%
Total Firm Assets4
293,397,986,258.49
282,697,291,678.31
255,707,099,715.41
223,940,416,622.14
194,958,113,724.01
202,946,283,267.48
161,183,088,769.55
89,646,473,691.69
161,124,537,714.28