The Quantitative International Equity strategy aims to provide investors with actively managed exposure to International equity markets, with consistent value added and low tracking error relative to the MSCI EAFE Index.
To achieve the strategy’s objectives, the investment team uses a quantitative investment process to build a portfolio that emphasizes traditional investment principles such as value and growth, while leveraging the advantages inherent to a quantitative approach.
Strategy overview
- Core, diversified, quantitative International equity strategy.
- Exposure to a diverse set of security selection, sector selection, and country selection alpha factors (including Profitability, Quality, Value, Technical, Growth, Analyst, and Sentiment), backed by economic rationale and empirical evidence.
- Transparent process and portfolio manager oversight, with the portfolio built using an optimization process.
- Investment team dedicated to proprietary research, including model enhancements, with an emphasis on continuous innovation.
Our approach
Investment philosophy and style
- The core philosophy that underlies all of our quantitative equity strategies is a belief that market inefficiencies exist that give rise to long-term risk premia, and unlike traditional fundamental approaches, quantitative investment managers can exploit these inefficiencies by using a systematic approach that both minimizes subjectivity and discretion and has an information processing advantage.
- To that end, the team blends the benefits of human and machine by investing in multiple factors backed by economic rationale and empirical evidence.
- While market inefficiencies relating to structural barriers and behavioral biases are persistent, other sources of alpha may be eroded over time as informational processing advantages decrease and skill levels in the market increase. To stay ahead, ongoing innovation is essential in the rapidly evolving quantitative investing industry, which is why the team conducts rigorous and dedicated research aimed at improving the team’s quantitative methods and tools over time.
Investment process
- Data is acquired daily from multiple data providers, and is then used to score each company in the investment universe on an array of risk and alpha factors.
- The team currently uses around 30-40 security selection alpha factors in their model, which are rolled up into seven security selection alpha factor composites (Profitability, Quality, Value, Technical, Growth, Analyst, and Sentiment), plus sector selection and country selection factors.
- Profitability. The Profitability score assesses a company’s ability to sustainably grow earnings. Companies that are highly profitable are better able to withstand economic shocks to their business. Some of the factors in this composite are CFROI®[1] and Forward Return-on-Equity (ROE).
- Quality. The Quality score provides quantitative insight into management behaviour and balance sheet strength. Low Quality scores can result when a company uses aggressive accounting practices, conducts excessive acquisition activity, or shows a strong reliance on external financing. Some of the factors in this composite are Debt Financing and Goodwill Growth.
- Value. The Value score can identify irrational investor behavior and mispriced investment opportunities. Some of the factors in this composite are Forward Price-to-Earnings (P/E) ratio and Price-to-Cash Flow (P/CF) ratio.
- Technical. The Technical score identifies market and holding movements before fundamental changes are apparent. Some of the factors in this composite are Crowding and Short Interest.
- Growth. The Growth score examines a company’s growth prospects, particularly in its earlier stages. Some of the factors in this composite are FCF Growth and ROE Growth.
- Analyst. The Analyst score identifies early signals of change as they arise. Some of the factors in this composite are Analyst Recommendations and Earnings Revision.
- Sentiment. The Sentiment score identifies overbought or oversold companies. Some of the factors in this composite are Williams %R and Coppock Curve.
- The other factors the team considers – risk factors – are designed to assess individual company risk. Risk factors measure those characteristics of a stock that can impact returns, but where the direction and magnitude is unpredictable.
[1] CFROI ® is trademark of Credit Suisse Group AG or its affiliates
Portfolio construction
- Portfolio construction is done through an optimization process, followed by a trade review before trade execution.
- The optimization’s inputs are the team’s alpha and risk forecasts, quantified by the team’s proprietary factor model, in addition to constraints and transaction costs.
- The team is cognizant that other unintended exposures within the portfolio could potentially overwhelm the positive contributions from the factors that are emphasized. Therefore, the process will also quantify and neutralize the impact of risk factors – such as currency, beta, or market cap size – as much as possible within the portfolio construction process.
All portfolio trades generated by the optimization process are reviewed by the portfolio manager prior to execution. The portfolio manager’s objective at this stage is to understand the economic rationale for the trades, ensure data accuracy, and identify and address any meaningful and relevant considerations that may not be captured by the model.