Fund Spotlight: a fresh approach to quality-growth investing
The ii Research Team offers an update and view on GQG Partners Global Equity Fund.
24th January 2024 10:30
by ii Research Team from interactive investor
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Managed by Rajiv Jain, the GQG Partners Global Equity Fundseeks quality-growth companies across global markets. The fund’s objective is to provide strong returns to investors, while managing downside risk over a market cycle. The fund has been available to UK investors since mid-2019, but the wider strategy dates back to 2017 in other regions. Jain cofounded GQG Partners in 2016, where he serves as chair and chief investment officer and the firm specialises in global, US and emerging markets equity strategies
Prior to GQG Partners Jain worked for more than 25 years at Vontobel Asset Management, helping grow the business from $400 million under management to just under $50 billion.
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To select high-quality businesses for the portfolio, Jain assesses financial strength, competitive advantage and valuation, believing that a fundamental driver of share prices is a company’s earnings over the long term. The process starts with traditional bottom-up investment analysis but is supported by less conventional analysis methods, leveraging in-house specialisms in forensic accounting, investigative journalism and expertise in technical areas, such as healthcare.
There is also a key emphasis on wider economic trends that define regional and sectoral positioning of the portfolio. Where Jain and the team interpret economic and market data as implying strong structural growth or deterioration of a given sector, they are prepared to rotate the portfolio quickly to accommodate – a strategy that has proven its worth over the track record of the fund.
“The refrain ‘we don’t do macro’ does not make a lot of sense to us,” says Jain.
Accordingly, while quality is a factor that represents a common thread throughout the history of the fund, sectors and geographies weave in and out of the portfolio as management position for differing macroeconomic conditions and consumer behaviours. It’s a highly active approach to fund management and challenges the status quo of finding quality among a narrow and static range of sectors.
What does the fund invest in?
As stated above, the fund is seeking quality equities with growth potential – profitable, well-managed companies with strong operating profit margins and stable earnings. Companies must demonstrate competitive resilience and headroom to keep growing themselves within expanding sectors. Current share prices must represent reasonable value based on GQG’s perception of forward-looking earnings and dividend projections. Analysis, rather than focusing on the determination between “growth” and “value” companies, seeks to assess whether the current price of a stock presents a reasonable valuation for the prospective earnings growth over the next five years and beyond.
The fund tends to comprise 40 to 50 names (currently 40) and its composition can differ greatly from its benchmark (MSCI ACWI index). Geographically speaking the fund currently is particularly overweight in emerging regions, such as India (8.5%) and Brazil (4.5%), as well as northern European countries: France (5.8%), the UK (5.3%) and Denmark (5.2%).
Further divergence from the benchmark is found in the sector weighting, which now skews in favour of technology - 31% (8 percentage point overweight), healthcare – 19% (8 percentage point overweight) and energy - 13% (9 percentage point overweight). Real estate, consumer staples and industrials are currently either omitted or greatly underweight. The fund can build up substantial concentrations in sectors, as is now the case with roughly half the fund in technology and healthcare. However, limits prevent the fund from becoming too thematically focused or concentrating above 10% of the portfolio in any singular name.
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In relation to where management see opportunity currently, GQG’s analysis of a business expands beyond the assessment of a company’s financials and management. GQG seek businesses with growth potential, but in sectors that will be supported by market and consumer dynamics – and healthcare is one of those sectors.
Healthcare is a particularly promising area for GQG, and the fund’s overweight allocation to the sector long predates the recent furore regarding GLP-1 diabetes/weight-loss drugs, which brought companies such as Novo Nordisk A/S ADR (XETRA:NOVA) and Eli Lilly and Co (XETRA:LLY) into the limelight. GQG highlights that the effects of anti-obesity drugs will have spill-over effects across the pharmaceutical industry and even beyond the wider healthcare sector itself as consumer behaviours begin to be impacted by the adoption of the breakthrough drugs. The fund’s holdings in Novo Nordisk and Eli Lilly comprise 5% and 4% of the portfolio respectively and the two companies have both returned north of 200% over the past three years. They make up part of a wider healthcare exposure for GQG, which comprises nearly a fifth of the portfolio.
How has the fund performed?
Performance has been strong over the fund’s track record on an absolute and risk-adjusted basis. The fund seeks to add value by outperforming in tougher, falling markets but the quality bias can lead to underperformance in fast-rising, momentum-driven markets, as we saw in 2023.
Looking back over the past few years, we see the effects on performance of the swift portfolio repositioning. As we entered 2022, the fund cut its more than 20% exposure to technology to low single digits and exposure to energy was hiked to close to 30%, in doing so capturing the subsequent outperformance of energy companies as prices rose, and largely avoiding the routing of growth stocks as central banks began to hike interest rates. The result was a resilient 4.4% return in sterling terms in 2022 against a backdrop of MSCI ACWI falling -8.1% and large-cap growth peers nearer -18%.
Last year was an example of a rising market environment where the fund very marginally underperformed, returning 14.6% (1.3% percentage points and 0.7 percentage points behind peers and benchmark) owing in part to a weak Q1 as the energy and healthcare allocations lagged and the fund rotated back into technology names.
Investment | 2023 | 2022 | 2021 | 2020 | 2019 |
GQG Partners Global Equity I GBP Acc | 14.6 | 4.4 | 19.1 | 12.2 | - |
Morningstar Global Large-Cap Growth Equity Sector | 15.9 | -17.5 | 14.6 | 23.3 | 24.1 |
MSCI ACWI Index | 15.3 | -8.1 | 19.6 | 12.7 | 21.7 |
Source: Morningstar Total Return (GBP) to 31/12/2023. Past performance is not a guide to future performance.
Since the inception of the UK available share class in mid-2019, the fund has achieved its objective of strong returns with lesser volatility of returns. The past three years have seen an annualised return for the fund of 12.6%, outstripping the 8.2% and 3.1% returns of benchmark and peers. The fund has achieved this return with lower drawdowns and a lower level of volatility than its benchmark.
Why do we recommend this fund?
GQG brings a fresh approach to both research and portfolio construction. What is more, with the medium-term future of corporate earnings uncertain, the fund’s focus on quality companies, with strong balance sheets and competitive market positioning, may prove a worthwhile factor for a global equity portfolio.
The fund’s high turnover approach, which can see the portfolio quickly rotate in and out of sectors, and benchmark agnosticism means it can perform very differently to its benchmark and other fund managers.
Furthermore, over three years, the fund has demonstrated its capacity to outperform the market while managing its downside risk effectively. While fundamental analysis is a key aspect of the stock selection process, the fund is differentiated by its dynamic macro calls and willingness to pivot into sectors supported by structural growth and out of those facing headwinds. The fund is a new inclusion on our Super 60 list as a global equities offering.
The latest factsheet can be viewed here.
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