Morningstar: Investec Global Equity

Tom Whitelaw, analyst at Morningstar: The Global equity team, headed by James Hand, has managed this fund since January 2006. Since this point the fund has used Investec's proprietary "4-factor" quantitative model to screen the MSCI World universe for potential investment opportunities. Stocks favoured by the model are then passed to Mark Breedon's global equities team for more fundamental analysis.

This mixture of quantitative screening and qualitative analysis works well in a universe as vast as the MSCI World and the model is able to narrow down the 4,500 potential holdings whose market caps exceed $1bn to a more manageable list of 500 names. The process was born out of the team's desire to cut through the ever increasing amounts of market data in a useful and repeatable way. It aims to find good quality companies at reasonable valuations and incorporates the behavioural finance observation that investor over or under-reaction to news flow exacerbates inefficiencies in the market. As a result the quantitative process looks at four distinct factors. It starts with a company s strategy and its historical ability to grow cash flow, with a focus on cash flow return on investment (CFROI), before moving on to an assessment of valuation with the use of discounted cash flow modelling. The model then looks at earnings revisions and favours companies whose profit forecasts are being upgraded. Finally, it looks at technical indicators to see if the market is already starting to reward the stock. If it is not the previous assumptions will be reassessed to make sure the fund is not walking headlong into a value trap.

Each of the four factors are weighted equally and graded 1-4. Any stock with a combined score of 12 or more is subject to further fundamental assessment by the analyst team, whose responsibilities are organised by super-sector. The team places a heavy emphasis on CFROI, firstly for valuation purposes to assess the returns and growth rates assumed by the market and secondly to monitor likely changes in it over time. Ideal investments are those companies who generate high and growing returns above their cost of capital. These ideas feed into a portfolio which aims to be super-sector neutral and contains a fairly eclectic mix of stocks from across the value, growth and market-cap spectrum. This places the fund in the Morningstar Global Large-Cap Blend Category. An emphasis on rising technical indicators also gives the fund a momentum bias, partly illustrated by the high standard deviation which exceeds the category average by 12%.

The fund strongly outperformed its Global Large-Cap Blend peers in 2006 and 2007, but lagged badly during the ensuing downturn. This weakness during market inflections is common to many quant approaches. However, despite posting a loss 5% above the category average in 2008 the fund still manages to outperform its average peer since the strategy was implemented. It also holds up better than some of the pure quant strategies we track thanks to the work of the equity analysts. Although the losses in 2008 can be hard to bear, we believe investors have good reason to look beyond one bad year here: in our view, the fund's experienced analyst team, robust process and longer-term strength make it a solid core global equity holding.
Strategy ;

Investec's Global "4-factor" team mixes quantitative screening with qualitative analysis to arrive at a 130-stock portfolio. The quant model runs a weekly screen on 4,500 stocks whose market cap exceeds $1bn. It was developed in 2000 to streamline the ever-increasing amount of market data in a useful and repeatable way. As the name suggests, it considers four distinct factors: value, quality/strategy, earnings momentum and share price momentum, each of which are scored from 1-4. It considers high cash-flow returns on investment, rising dividends and net present value as determined by discounted cash flow analysis. It also attempts to take advantage of behavioural finance theory by assessing upward revisions of earnings estimates on the view they will not be fully factored into the price as investors and analysts are reluctant to alter their views. The resultant score ranges from four (terrible) to 16 (perfect), but all stocks which score above 12 (around 500) are considered for inclusion in the portfolio and will be assessed by the global equity analyst team who verifies the assumptions made by the quant model. Any stock in the portfolio which subsequently drops below 12 is sold unless the analysts make a strong case to hold and this acts as an excellent sell discipline.

Management

The fund has been managed by Investec's Global 4Factor team, run by James Hand, since January 2006. Hand has been at the group for eight years and worked within the original 4Factor team. This changed notably in 2003 when Investec switched its investment strategy from using 4Factor to run portfolios on a quant basis to using it as an initial screen only. As a result, five of the former team members left the group to set up Origin Asset Management. The fund now uses both qualitative and quantitative research to construct the portfolio and, as a result, Hand works closely with Mark Breedon, Investec s Head of Global Equities. Breedon has been at the group for five years and has over 31 years of industry experience, the last 12 of which have been spent managing global equity portfolios. The pair are also supported a team of more than 20 experienced sector specialists, quantitative researchers and risk managers. There is also a performance system in place which measures the analysts' results over and above those of the 4Factor model. This helps gauge analyst performance and helps determine their remuneration.