Global Equity, Quality Style

Client-Specific Concerns

It was essential that the appointed manager show clear and consistent exposure to ‘quality’ factors and minimal exposure to other styles – particularly growth and value – to avoid overlap with the investor’s incumbent managers. Suitable strategies also had to show relatively low excess return correlation with the incumbents to provide return diversification. The investor was not willing to invest in strategies that are largely systematic or quantitative, so only those with a “discretionary” approach would be considered. Other parameters included the integration of ESG analysis, minimum strategy AUM of USD 500m, and a live performance track record of more than seven years.

Outcome

• Validating quality: investors should be cautious when a manager self-describes as being focused on “high quality companies”; few (if any) invest in low quality companies. The team assessed both style characteristics and performance patterns – and considered the consistency of these over time – to validate each manager’s claims about quality. Among the 73 strategies assessed, all of which claimed to be focused on quality, more than 20 showed no such focus.
• Identifying undesirable factor exposures: quality managers are generally expected to deliver strong downside protection versus benchmark in periods of market weakness: indeed, Q1 2020 was a case in point (Read More). However, managers often (intentionally or not) blend quality with other factors, typically growth but also value, and these blends can materially impact the performance pattern. Among the 73 strategies assessed, approximately half showed a statistically significant style tilt to either growth or value factors. Those with value exposure had shown little to no downside protection.
• ESG integration: discretionary global equity managers with a quality focus and/or a sustainability/ESG focus have reasonably close natural alignment with Shariah investment principles: many have little-to-no financials; most have little exposure to industries such as alcohol, tobacco, gaming and weapons. While Shariah compliance requires the exclusion of more than 20% of the MSCI ACWI index, a considerable number of active equity managers require little-to-no customisation to their standard portfolios in order to be suitable. is relatively common among quality managers. Managers with a dominant focus on quality tend to integrate ESG analysis into their process quite naturally, with considerable overlap in the issues being examined. For most, the growing importance of ESG issues has led them to simply formalise, rather than change, their approach.