CASE STUDY
Global Value Equity
Engagement at a glance
The client, UK private pension fund, was recalibrating its approach to value investing given its view that ‘deep value’ had become too cyclical and volatile, with technological disruption and innovation across many industries increasing the prevalence of so-called value traps. The client wanted to explore different approaches to value investing with the aim of replacing an incumbent ‘deep value’ manager, reorienting its allocation, and achieving a target return of at least 2% per annum above its benchmark over a market cycle. A growing emphasis on ESG—and specifically climate-related considerations—was also prompting this client’s inward shift on the value spectrum.
Client-specific Concerns
This investor was seeking to appoint a global value manager whose strategy would sit alongside and complement an existing ‘quality growth’ manager with respect to both style and return—while providing significant diversification of excess returns. The client also expressed an interest in looking for managers whose strategies could be described as ‘pragmatic’, in that they might be willing to express specific views on country selection, sector/industry choice, currency and market capitalisation.
Outcome
- Understanding the value manager landscape: bfinance worked with the client to help it assess the portfolio holdings of prospective managers over time, enabling the pension fund’s investment team to gain a deeper understanding of the managers’ style profiles. Suitable managers were required to demonstrate a clear value bias while avoiding a ‘deep value’ investment style.
- Assessing the potential overlap between new and old: bfinance assisted the client in determining which managers were also able to demonstrate negative excess return correlation patterns ex post and ex ante with respect to its existing ‘quality growth’ manager; the client also sought to determine how correlated the prospects’ portfolios would be to that of the ‘deep value’ manager it planned to replace.
- Evaluating performance relative to multiple benchmarks: Given the value headwinds over the past few years, the client placed a greater emphasis on evaluating prospective managers’ quantitative performance relative to an appropriate global value benchmark instead of the pension fund’s broader equity benchmark, the MSCI World Index. That said, however, the team also wanted to see evidence of managers’ demonstrated ability to generate alpha relative to the core global benchmark over time.
- Weighing the balance between defensive and opportunistic styles: bfinance worked with the client to identify managers that could suitably demonstrate the ability to capture value-oriented upside as a counterbalance to the strong defensive profile of its incumbent quality growth manager.
- Material reduction in fees: bfinance negotiated a final management fee that represented a 25% reduction versus the fee being paid to the client’s incumbent ‘deep value’ manager.