Investing in stocks systematically has its benefits — but global investment house Schroders believes that to generate consistent outperformance over time, human portfolio managers are still needed to work alongside the computers.

Schroders puts those beliefs into practice by means of its QEP Investment Team, which manages about $44 billion for clients around the world.

Last week, one of the team’s senior portfolio managers Stephen Kwa was in Bermuda last week to attend the Schroders annual investment conference in Bermuda and sat down with The Royal Gazette to explain how the QEP (Quantitative Equity Products) concept is put to work.

The QEP team, led by Justin Abercrombie, numbers some 30 people and manages almost ten percent of Schroders’ total assets under management in its seven distinctly themed products, including Global Value, Global Yield and Emerging Markets.

Each portfolio holds more than 500 equities — a high number compared to the 30-50 stocks that a more traditional managed mutual fund might hold — which leads some investors to think of it as being like an index fund.

“It’s not an index at all,” Mr Kwa said. “It’s how you put the portfolio together that matters.”

The QEP team selects from a universe of about 15,000 stocks across 40 countries — compare that to the 1,600 or so stocks in the MSCI World Index and the 500 stocks in the S&P 500 Index.

Using quantitative tools set to measure equities by value and quality (as demonstrated by profitability, stability and financial strength), the QEP team whittles down the 15,000 stocks to a “buy zone” comprised of the top third of them.

Each stock is then further analysed through the use of a “decision tree” appropriate for the company’s size or industry.

“Decision trees were originally developed for use in medical science, but Justin Abercrombie adapted them in late 1990s for stock picking,” Mr Kwa said. “It’s a powerful way of analysing companies and looking at the combination of factors that leads a company to outperform.”

The team builds in diversification by industry and company size, company-specific and industry factors are considered, and no one stock can make up more than 0.75 percent of the portfolio. It’s a process Schroders calls “intelligent portfolio construction”.

The strategy has the benefits of sophisticated stock picking, while mitigating risk by holding a large number of stocks, so “if a company goes belly up, it won’t have a serious impact on return”, Mr Kwa said.

The approach has been effective, with each one of the QEP products outperforming its MSCI benchmark since inception, by an excess annualised return of between 1.15 percent and 5.44 percent, gross of fees.

Mr Kwa said he believed the QEP products could have a place in Bermuda insurers’ investment portfolios, as they had achieved robust, risk-adjusted returns over time.

For more information, go to www.schroders.com/qep/home/