CASE STUDY

Global Equity, Quality Style

Insurance Company, UK | Winter 2020

Engagement at a glance

A UK-based, globally known insurance brand hired bfinance to identify a global equity manager with a clear “quality” focus. The investor held three external managers in its global equity portfolio, split into three distinct style groups: quality, growth and value. Over a five-year holding period, the incumbent quality manager had delivered strong downside protection but, overall, had lagged both the benchmark and peers. The investor decided to re-tender this USD 160 million mandate to identify alternative options.

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 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.

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