Interactive Investor

‘There’s no reason for us to exist without performance’

Brian Kersmanc, manager of GQG Partners Global Equity fund, explains why he’s not afraid to make big changes to the fund when he spots a new opportunity or thinks it's time to act and reduce exposure to a certain area.

10th July 2024 09:00

by Kyle Caldwell from interactive investor

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Brian Kersmanc, manager of GQG Partners Global Equity fund, explains why he’s not afraid to make big changes to the fund when he spots a new opportunity or thinks it's time to act and reduce exposure to a certain area.

He also tells Kyle Caldwell, interactive investor’s funds and investment education editor, why it’s vital that the fund’s performance beats passive funds, why the fund has only a small weighting to the UK, and explains where he’s currently finding opportunities.

GQG Partners Global Equity fund is one of interactive investor’s Super 60 fund ideas.

Kyle Caldwell, funds and investment education editor at interactive investor: Hello and welcome to our latest Insider Interview. I'm Kyle Caldwell, and today I have with me Brian Kersmanc fund manager of the GQG Partners Global Equity fund. Brian, thanks for coming in today.

Brian Kersmanc, manager of the GQG Partners Global Equity fund: Well, thank you very much for having me.

Kyle Caldwell: Brian, one of the key differences between this fund and other global strategies is that you have exposure to emerging markets. India is your second-biggest country weighting, so could you talk us through that?

Brian Kersmanc: In terms of the emerging markets, we're very opportunistic. We want to go to the different places where we can achieve our objective, our goal, of quality compounding over the course of time.

So, why limit out a market or an area of the market [where] we think we can actually achieve that? The emerging markets are a really interesting place to us at this point in time. There's a lot of markets there that have been growing pretty rapidly over the course of the past almost decade.

Liquidity has gotten a lot better within these markets. A lot of people are surprised to hear that liquidity in terms of daily trading volume within the emerging markets has gone up four times over the course of the last eight years. So, there's a lot more liquidity that you can move around and be nimble in the emerging market space.

In terms of sizing, I think a lot of people are surprised to hear as well that the top seven countries, from the developed markets' standpoint outside the United States, are now smaller than the top seven countries in the emerging market space in terms of market cap and GDP.

So you're getting a lot more growth and you are getting very large, robust markets and that's a place that we like to operate in.

Coming back to India, it is a really interesting place because the types of names that we're owning there right now are a little more the infrastructure or the utility type of space. And what's interesting about that is you're getting 15% to 20% compound annual growth rates out of these businesses with a long degree of visibility of where those earnings are coming from.

But it's the boring classic utility that we're used to falling asleep reading over. But you're getting really interesting growth. And if you can compare and contrast that either/other areas of the emerging markets, it's just more attractive to us than maybe trying to buy something out of the e-commerce space in China, for example.

The multiples may have come down pretty severely, but the companies are only growing 5% on an annualised basis. So, you're really trying to make a call that they reaccelerate.

We're getting really good growth here, fairly under-covered in terms of the sell side. So, not necessarily a well-trodden path, and there are also very large liquid names as well. The mega-cap space has just been sort of forgotten about for a while, but they're exhibiting great growth.

Kyle Caldwell: The fund holds around two-thirds in the US, which is similar to the MSCI All Country World Index. So, how does your exposure differ to the index?

Brian Kersmanc: In terms of the way we think about country exposures in general, we are fundamental bottom-up investors. We're also agnostic to benchmark sizing. So, realistically, if we didn't find any interesting opportunities in the US we could go to a zero weight.

Realistically, there's always something interesting going on within a very large, deep market like that. But we can go pretty severely underweight, pretty severely overweight and go up to 20 percentage points over what we see in the bench.

I think [what's] much more interesting is the combination, or the make-up, of those names within that construct, even if you just think about the portfolio in general, the top 10 of our portfolio tends to be 35% to 50%-plus of the portfolio overall.

And a lot of those names happen to be US names. So, it's not even just a function of how much US we're choosing to own. It's one of these individual names, be that in the tech space, be that in the consumer staples space, that we're choosing to own in a large size.

We believe that quality compounding from those higher-weighted names in our portfolio is what's really driving the force behind the portfolio and the compounding. We really want to rally around those names and limit exposures to theses that we don't have as much confidence in.

So, we really like that top-heavy nature of the portfolio and those concentrated convicted calls on those names in the US and non-US. But in terms of those names, we like those as well.

Kyle Caldwell: How hard is it for an active fund manager like yourself to try and beat the global index? Particularly at the moment when there's such a narrow set of companies that are dominating, which are, of course, the US technology giants.

Brian Kersmanc: It's an interesting point in that those Magnificent Seven in the US, or the Super Seven, or - I can't remember the moniker in the European landscape - as well. They also have a similar sort of analogous group of large market cap names. The fact is that's where the earnings are coming through, so what we're trying to do is we're just trying to find the area where the earnings are coming through and not pay too egregious [a] price for those earnings and for that quality that we're buying.

So, if that narrower set of names happens to be the area where the earnings are coming through, because maybe they're a little bit more well capitalised, they have better free cash flow than other folks, they have better balance sheets, they have better resources and opportunities, then we're more than happy to express the weightings in that direction, and that's what we're doing.

We're taking these concentrated calls, but we'll be opportunistic and go where the earnings are. So, if this starts to broaden back out and there's other winners that are out there, we will reallocate the portfolio to those other areas.

We have in the past reduced exposure when we didn't think those top names in the US were performers. 2022 is a great example of that. A lot of these tech names became overly frothy, over-extrapolated. We saw it was very risky, owning those and we went to effectively a zero weight even within our US and global portfolios in terms of tech.

Again, it's about how much we choose and when we choose not to own these things as much as when we choose to own them. But that comes back down to earnings. Our view [is that] earnings are like gravity and we're going to follow the earnings to the best path to get those quality compounding returns.

Kyle Caldwell: The UK is less than 3% of the fund. Is it a stock market that you're looking at a bit more closely now, given the cheap valuations on offer?

Brian Kersmanc: Valuations aside, the UK is a fairly attractive, deep market overall in the European landscape and in the developed landscape overall. There are names that we deem high quality in the UK landscape. However, the opportunities that are just dictating that there's more interesting names with better fundamentals from a bottom-up basis with attractive valuations in other places right now doesn't mean we can't own things in the UK.

I would argue that over the past couple of years, UK and Europe combined was a very large weighting, actually very large, overweight. And we have an international ex-US product and it wasn't necessarily because we were overly bullish on the macro environment behind the UK or overly bullish on the macro environment behind Continental Europe. It was more the individual names that were sitting in there.

If you're in AstraZeneca (LSE:AZN), for example, and you're selling oncology drugs, you're a very solid compounder. You have a lot of drugs coming down the pipeline that are potential winners to extend that pipeline and visibility, and you're trading on a reasonable multiple. That's something that's still interesting to us from a UK perspective.

[It doesn't matter whether it's] in the UK, if it's in Continental Europe, or in the US. That is an interesting fundamental bottom-up risk/reward to us. So, it's less about where the country is. It's much more about what the fundamental opportunity set is and where we choose to weight those names.

Kyle Caldwell: And when was the last time you bought a new holding for the global fund? Could you name it and explain why you did purchase it?

Brian Kersmanc: So, we're making changes constantly. The idea being - and I love using this analogy in terms of the way we think about managing the portfolio - that it's almost like you're putting a sports team on the field and you have an expectation, or what you believe is going to happen.

You put the players on the field at the beginning of the game that you think are going to execute really well over the next several quarters of the game, or what have you. In our case, it's a five-year outlook. But then as the game starts, things evolve. Certain players do better than you thought, certain players do worse. You may want to substitute certain players out. The opponents may do something different.

The conditions may change. It might be a bright, sunny day, kind of like the weather in London. You could have a bright, sunny day and 15 minutes later it could be pouring rain on you. You want to adjust to the conditions as the conditions adjust. We look at portfolio turnover in the same way.

We want to continually optimise based on what we see here and now, so if I have to take a player or a name out of the portfolio because it's not optimised for the current environment, that doesn't mean that we can never buy that back again. We can re-engage that name, especially in the large liquid mega-cap space that we're operating [in], and we can re-engage that name later and optimise that over the course of time.

So we're constantly making tweaks and adjustments to the portfolio over the course of time. Another thing that a lot of portfolio managers don't do too well, this is us included. We're terrible - we all are, as a breed, - at sell discipline, but having this sort of constant churn and re-evaluation of names and putting them against what's already in your portfolio actually helps with your sell discipline to some extent, because if the thesis becomes stale, you find this other name that you think is interesting.

We have to find a place to fund that from. So, allowing a certain level of turnover in the portfolio helps with that sell discipline because, let's face it, everybody sells based on the fundamentals have deteriorated, the price got too expensive for the stock, [but] by the time all these things come to fruition, the stock's already lost value in terms of that. So, having this constant re-evaluation keeps the portfolio fresh so to speak, with a more up-to-date thesis, and let that compound over the course of time and optimise it.

To go back to the original question that you asked me on some of the additional things that we've done more recently, we have gotten back into a little more of those consumer staples names.

More recently, more Steady Eddie-types of names overall, the valuations look a little bit more attractive. So, as we brought down some of that tech exposure within the last couple of months, we have increased some of these types of names that look a little more interesting on a fundamental bottom-up basis.

It's not that we ever fully dismissed and never wanted to buy those names again. It's not that we're fully dismissing the tech names, that we've reduced the exposure in. It's back to that analogy that I mentioned about putting that player on the bench, and then when the timing is right, the conditions are more favourable, you can re-engage that player and then bring that back. Consumer staples were brought off the bench and brought back into the portfolio, so to speak.

Kyle Caldwell: In the past, the fund has been quick to move when you spot an opportunity or reduce a sector if you think that sector is losing its shine. So, what opportunities are you finding at the moment?

Brian Kersmanc: Again, it's a fundamental bottom-up process. So, we're going through and reassessing all the data points and the probabilities of the different outcomes that could come over the course of time. In terms of the reaction to that, the way I like to describe it, it's an asymmetric reaction function to risk versus opportunity, because we're looking at risk in an absolute term, not necessarily relative term.

If we believe that there is an increasing risk to the portfolio, even if we don't have all the information, I always joke that it's almost like a shoot first and ask questions later mentality to risk management. So, let's pull back, so we can fully understand what that risk is. If that means you're selling down a name, that means you're selling out a name, let's back off to make sure that we understand that risk a little bit better. Then if that risk ends up not being as bad as we thought, we can re-engage back into that name later.

In terms of the opportunity, we need to see the data coming through to say, OK, this is a more compelling opportunity. So, the name is just simply coming off the bottom. The valuations are looking more reasonable. It's hard for us to keep pace in that type of environment because that's just a sentiment change. Q1 of 2023 is a great example of this. Tech came from being a zero weight in our portfolio. It was a very unloved part of the market and towards the end of 2022, 10 December, although some people didn't really like a lot of those tech names and all of a sudden 10 January, everybody was in love of those names.

In 2023, that was a valuation-led rebound. It's hard for us to participate in that, but then when we started to see the data points coming through in terms of the semiconductor demand coming back, in terms of the pricing power coming back, in terms of the AI investment related that was coming back on some of those comms services, the advertising revenue coming back, once we saw those, we acted aggressively and repositioned the portfolio.

It took us a quarter or two to readjust the portfolio in that direction. So, we tend to be a little bit slower in our own terms on sort of that reassessment towards buying into absolute risk and getting into opportunities.

I would say we were a little bit faster than maybe the broad set of the ecosystem that might take a little bit longer to do some of those adjustments over the course of time, but very quick to react on the downside, or the potential for downside risk to preserve capital.

Kyle Caldwell: Finally, a question we ask all fund managers we interview. Do you have skin in the game?

Brian Kersmanc: This is something that is a firm belief of our founder, Rajiv Jain. In terms of the founding of the firm, there's two things that we think are quintessential data for any sort of asset manager.

Number one, performance is the only thing that matters. As the only industry in the entire world where you can go and get average for free, if we're not delivering outsized performance, you can go buy an index fund and you can replicate average performance if that's what we're putting out for free. So, there's no reason for us to exist without performance.

The second thing that we really wanted to hold on to is to set a benchmark standard in terms of eating our cooking or client alignment, so to speak. We actually have a policy at GQG that we're not allowed to do personal trading. So, myself, any of the other sales team members, our front desk receptionist, we're not allowed to own anything other than index funds or GQG strategies.

So, a heavy commitment to capital in that sense. As a portfolio manager, I have a substantial portion of my own net worth invested in the strategies alongside investors, way more than my wife is comfortable with, I can assure you.

And I get the question. I promise you that if we lose 5% to 10% in a year, it's not about how you beat the benchmark, it's about how I just lost 5% to 10% of my kids' college education savings.

Our founder, Rajiv Jain, actually takes it further. He has the overwhelming majority of his net worth invested in the same products, strategies and vehicles as investors. So, it's something we take near and dear to heart. We only want to do well when our clients do well and we exhibit that in terms of putting our money where our mouth is.

Kyle Caldwell: Brian, thanks for coming in today.

Brian Kersmanc: Thanks for having me. Appreciate the discussion.

Kyle Caldwell: That's it for our latest Insider Interview. I hope you've enjoyed it. Let us know what you think. You can comment, like, and do hit that subscribe button and hopefully I'll see you again next time.

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