Active spotlight – Q&A with Global Equity Income fund manager Sharon Hill

• Vanguard’s QEG’s investment process is designed to pick up what other investors might miss or abandon due to human biases or a short-term mindset.
• Its quantitative model is customised for each geographical region in which the team invests.
• The model is designed to seek stocks with sustainably growing dividends and reasonable valuations, which the team believes have the potential to deliver positive returns for investors over the long term.

The Vanguard Global Equity Income Fund is managed by two highly experienced investment firms with different but complementary approaches. Vanguard’s Quantitative Equity Group (QEG) looks to invest in companies with sustainable dividend growth using a quantitative approach driven by company fundamentals. Wellington employs a fundamental, bottom-up, long-term, value-sensitive approach to invest in businesses with the ability to pay sustainable dividends and the willingness to return capital to shareholders. 

Sharon Hill, senior portfolio manager within the portion of the Vanguard Global Equity Income Fund managed by QEG, describes how, as a fully integrated part of the broader Vanguard organisation, she draws upon entire teams of experts devoted to a diverse range of specialties including economic research, risk management, trading cost analysis and machine learning.

1. How do you think about investing and what process do you use to manage the QEG portion of the Vanguard Global Equity Income Fund?

(SH) We believe that investing in companies with sustainable dividend growth, solid fundamentals and attractive valuations can give investors who are seeking exposure to global equity income the best chance for investment success. 

What makes us different from traditional stock pickers (who are often seeking the same characteristics in stocks) is that we use a rigorous process to identify these companies, so that we can scale and enhance the approach at extremely low cost. Our process is designed to pick up what other investors might miss or abandon due to human biases or a short-term mindset.

At the heart of our process is a quantitative model that assesses every stock in the investible universe each day. The model assigns each stock a score (which is essentially an expected return) based upon a blend of predetermined factors – metrics like dividend growth and sustainability, valuation and market sentiment. 

We monitor the portfolio daily for alignment with risk guidelines that we have developed in collaboration with Vanguard’s Risk Management Group. We seek to minimise risks that we do not believe investors will be compensated for over time. To periodically rebalance the portfolio, we run a portfolio optimisation programme that aims to maximise expected returns, trading them off against risk and transaction costs.

2. Tell us a bit more about your quantitative model.

(SH) Our quantitative model is customised for each region in which we invest, namely North America, Europe, Japan and Asia-Pacific excluding Japan. For example, the factors we use to assess stocks in Japan differ from those we use in North America. These customisations are based on detailed research which combines economic intuition with empirical analysis.

3. Could you give an overview of your team and the scale of the resources you have access to?

(SH) QEG consists of 29 investment professionals in portfolio management, analyst, trading and developer roles. On average, this talented team has on average 12 years of experience, 50% hold CFAs, 85% have a graduate degree or more and five members hold PhDs (as at the end of February 2023). Meanwhile, Vanguard’s scale and ownership model¹ gives us access to significant resources, including economic research and risk management teams.

4. In 2021, we emerged from a three-year period during which accommodative monetary policy likely drove the outperformance of stocks with exuberant growth expectations, regardless of valuations. How have you and the team navigated this environment? And how do higher interest rates affect your investment process?

(SH) As investors who focus on fundamentals, that environment made us question whether valuations still mattered and whether fundamentals would ever prevail. While we were confident that this was indeed the case, we believe that measuring these characteristics in a nuanced manner has become more difficult. 

We continue to work on enhancements to our model and process, and are taking an even more aggressive approach to prioritising research and allocating resources. We are more focused on model research with the potential to offer less correlated sources of excess returns. 

For example, in certain regions, we have diversified the way in which we measure valuations, adding additional metrics and a greater focus on cash flow dynamics. We have not turned away from the importance of valuations – rather, we have enhanced the way we measure it. 

Some investors may have turned to high dividend-paying stocks for income during the sustained period of low interest rates. On the margin, higher interest rates could contribute to lower absolute returns if this demand dynamic materially affected prices. QEG believes that, when absolute return expectations are lower, an active process that can deliver value over and above the index return is more valuable, especially when it comes at a low fixed cost.

5. Can you highlight a couple of recent interesting investment opportunities within the QEG sleeve of the fund?

(SH) As quantitative investors, we generally do not focus on individual holdings, but rather the factor exposures of our portfolio. One interesting opportunity has been among the mid-range dividend yielders in our space – companies that have a commitment to growing their dividend yields and are financially well-positioned to do so. 

This opportunity is due to the dynamic that played out in last year’s defensive market, if we take the FTSE Developed High Dividend Yield Index as an example. In GBP terms, the index was up over 7% (to 31 December 2022), whereas the broad FTSE Developed Index declined by at least that much. 

Even within the high dividend yield space, the market favoured the highest dividend yielding stocks which experienced some valuation expansion, whereas stocks with more modest, yet still healthy, dividend yields did not perform as well. 

Our model is designed to seek stocks with sustainably growing dividends and reasonable valuations, and we believe that the current environment should provide strong opportunities for our process to add value.

6. How would you define your active edge?

(SH) Our active edge, which powers the long-term success of our investment strategies, is that we deploy economically-sound, data-driven systematic processes embedded within Vanguard’s culture and cost structure. 

We have deep expertise in factor and alternative risk premia garnered from academic training and managing money across market cycles over decades. This history of insights and proprietary methodology built and enhanced over more than 30 years gives us a head start and relative advantage versus competitors as we take on new analysis. 

While academic credentials and experience can be found at other firms, no other firm shares Vanguard’s scale and ownership model. This gives us access to significant resources and an industry-leading cost advantage. In addition, I believe we have a cultural edge: Vanguard’s investment philosophy discourages the excessive focus on near-term results that can often be found in this industry.

^{1. Rather than being publicly traded or owned by a small group of individuals, The Vanguard Group, Inc. is owned by Vanguard’s US-domiciled funds those funds, in turn, are owned by their investors. While we cannot replicate this structure in Europe, we believe that this unique mutual structure aligns Vanguard’s interests with those of our investors globally.} 

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

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Investments in smaller companies may be more volatile than investments in well-established blue-chip companies.

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