The period since the foundation of our QIS team has been eventful. The Global Financial Crisis, Brexit, Covid, conflict in Europe and the Middle East, an inflation break-out leading to a new interest rate regime. And now, trade wars. As the title of that 1963 Spencer Tracy movie put it – It’s a mad, mad, mad, mad world.
Given today’s elevated geopolitical risks, client portfolios are exposed to more sources of volatility than at any time in recent history. It’s essential to pay close attention to potential pitfalls as well as return opportunities.
In this article we’ll show you how our unique Enhanced Index approach deals with unintended risk and helps investors navigate the unexpected. We’ll also explain why our QIS team mantra is reflect, learn, improve.
The benefits of an enhanced index strategy
The best of both worlds?
Concerns about performance and fees in traditional active strategies have led many clients to give up on active investing and go passive.
However, there is an alternative. We believe enhanced index blends the best of both worlds with a systematic approach to targeting index outperformance at low cost.
Controlled risk and competitive fees
High return targets require high active risk budgets, which increase the probability of larger underperformance.
Competitive fees mean more compounding benefits to investors
Enhanced index takes a different approach. By controlling the risk budget, incremental outperformance can add value for investors by compounding through time with lower chance of underperformance.
Achieving this at competitive fees can lead to more compounding benefits for clients.
Glass box, not black box
Human biases in discretionary processes can be a large driver of poor returns. For example, holding losing positions for too long, buying at the top and selling at the bottom.
We manage this by taking a systematic approach with built in guard-rails. This helps us preserve the benefit of proven return drivers such as Quality, Value and Momentum.
Our version of systematic investment is a glass box with full transparency - without sacrificing human control.
Why Aberdeen for enhanced index investing?
Experience counts
While our World Equity Enhanced Index Fund is celebrating its 10th anniversary, we’ve been managing money using a systematic process for 20 years.
We’ve navigated many market ups and downs. Our team has an average tenure of 15 years with even longer market experience. We’ve been stable through unstable markets.
A commitment to continuous improvement.
A key factor behind our longevity is a commitment to continuous improvement. While our process hasn’t wavered, we’ve enhanced it as we’ve learned, refining and improving how we manage your money.
Diversified and differentiated by design
Unlike many investors, our approach uses more than one source of potential return as opposed to being biased towards a single investment style.
The fund’s dynamic risk management process aims to ensure portfolio returns are driven by our intended sources of return while minimising unintended risks as they evolve through time.
Price and coverage
In addition to our World Equity Enhanced Index Fund, we offer 6 regional versions of the same strategy.
We’re competitively priced with an annual management charge (AMC) of 10bps and ongoing charges figure (OCF) of 14bps.
The Aberdeen enhanced index strategy
We target proven drivers of positive return that we call factors. We tilt our strategy away from the benchmark and towards stocks with those characteristics:
Quality: well-run businesses with stable growth in profits, low levels of debt that don’t require large capital investments.
Value: we want to own Quality companies at a reasonable price – note, we’re not looking merely for cheap companies, rather for high quality companies without overpaying for them.
Momentum: positive sentiment in the companies’ business operations needs to be recognised by the market in order for this to translate into a rising share price.
Our multi-factor approach brings diversification benefits because factor performance varies depending on the market environment at any one time. Rather than selecting between the factors, we target companies with the best combination of factors. We like well-run companies at competitive prices with positive returns.
Dial up targeted returns - but not the risk
A critical area of improvement for us over the last 20 years has been our ever-sharpening focus on managing unintended risks.
Simply targeting our return drivers is not sufficient for delivering consistent returns. We maximise exposure to our factors subject to the constraints on stock, sector, and country limits relative to standard benchmarks.
However, our factors are not the only drivers of returns in equities. Other risks change through time and can range from tariffs, developments in artificial intelligence (AI) technology, a spike in oil prices, or the dollar falling in value.
Risk scenarios can be defined and mapped to individual stocks.
These risk scenarios can be defined and mapped to individual stocks in order to determine the aggregate portfolio exposure – in a similar way that the weight of a particular sector in an index is the aggregate of the stocks in that sector.
For example, the US has a large concentration of technology companies, and consequently, developments within AI can have a meaningful impact. Think back to the unexpected breakthrough by the Chinese-developed DeepSeek AI technology.
Therefore, when we are seeking to increase exposure to our return driving factors, we also need to take care to avoid overly amplifying exposure to temporal and dynamic themes in macro and geopolitical events.
Dialling up targeted returns, but not the risks
One way we manage dynamic risks is by working with Aberdeen's Global Macro Research team. We define a range of scenarios and map them to the stocks in the index. This allows us to identify if factor allocations are increasing exposure to these potential macro scenarios in the form of unintended risk.
The introduction of our dynamic risk management process has helped us deliver better outcomes for customers. Our reflect, learn, improve mantra continues to reap rewards.
Final thoughts…
In this mad, mad, mad, mad world, a focus on drivers of positive return is not enough. It’s important for investors to detect, understand, and manage unintended risks wherever possible. Our systematic, multi-factor enhanced index strategies have the potential to mitigate human biases, control risks, and deliver excess returns at competitive cost.