A Young Fund Led by an Experienced--and Excellent--Manager
Silver-rated GQG Partners Emerging Markets Equity is managed by Rajiv Jain, who built a superb record at Vontobel.
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GQG Partners Emerging Markets Equity's manager, strategy, and price all stand out. It earns a Morningstar Analyst Rating of Silver.
This fund's parent firm, GQG Partners, was created by Rajiv Jain in mid-2016 after he left Vontobel Asset Management. At Vontobel, he built an enviable record, most notably with Virtus Vontobel Emerging Markets Opportunities (HIEMX) and Virtus Vontobel Foreign Opportunities (JVXIX), which he ran as sole manager from 2006 and 2002, respectively, to March 2016. He calls his approach "quality growth." Jain looks for companies with a manageable amount of debt, if any; proven leadership with a record of prudent capital allocation; and a history of weathering tough economic conditions. He's more interested in steady growth than the firms with the highest growth rates. He wants to buy, or add, when they're out of favor, relatively speaking--though they don't have to be cheap.
When he finds such companies, Jain tends to stick with them a long time. That alone is unusual, and positive in that it avoids short-term thinking and reduces trading costs. But once in a while, citing changing dynamics of an industry or the like, he'll quickly transform major portions of the portfolio. A key example took place a couple of years ago, after he left Vontobel. Jain had always had quite high stakes in consumer staples, as their steady growth, entrenched positions, and other traits fit the pattern that he looks for. But when the growth of household products firms slowed even as their valuations rose, and e-cigarettes and some local developments posed a new and serious threat to tobacco firms, his consumer staples stake fell drastically. (It has since rebounded.)
There are some uncertainties here. Jain works with nine analysts that he's hired; while they're experienced, none worked with him at Vontobel. Jain also has a lot on his plate. Although he is not CEO of GQG Partners, he is sole manager of four strategies, and the full analyst team reports to him. But his long record and compelling approach--which tends to hold up relatively well in downturns--plus a reasonable price make this strategy an attractive option.
Process Pillar: Positive | Gregg Wolper 05/20/2019
Rajiv Jain uses the same "quality growth" approach here that he installed at Vontobel Asset Management, earning the fund a Positive rating for Process. He wants reliably growing companies, but only if they're fundamentally strong with manageable levels of debt and a proven ability to weather slow economies. He often allocates substantial assets to sectors or countries. In the past, tobacco stocks were heavily overweight in his portfolios. But though he usually holds stocks for many years, he'll change direction decisively if he feels it appropriate, and he cut those stakes sharply a few years ago when he saw conditions becoming much less positive.
Jain and his team screen for high returns on equity and assets, low to moderate leverage, and a market cap greater than $1.5 billion. That narrows the universe from 50,000 to about 350 potential candidates. Then they use fundamental analysis to research future growth opportunities, estimate risks, analyze the accounting to ensure its accuracy and transparency, and then estimate a reasonable price. The strategy is moderately concentrated, with 50-70 holdings and hefty (4% to 7%) weightings in the top few stocks. Turnover at Vontobel was usually fairly low, but it can get high if he decides to make big changes.
Jain is the sole manager and much of the time he will come up with investment ideas and assign one of the analysts to work on it, but sometimes the analysts bring ideas to him.
Rajiv Jain clearly doesn't try to match this fund's portfolio with the MSCI Emerging Markets Index. In the March 31, 2019, portfolio, this strategy had 38% of its stock assets invested in the financial-services sector (according to Morningstar's classifications), much more than the index's 24% weighting, and had 18% of assets in the consumer defensive sector, versus 7% in the index. Conversely, the portfolio contained no consumer cyclical stocks, while the benchmark had more than 11% of assets there.
Although Jain is typically a long-term investor, he'll make decisive changes if he thinks it necessary. A key example took place in 2016, after he left Vontobel. Jain had always had quite high stakes in tobacco firms, as their steady growth, entrenched positions, and other traits fit the model that he looks for. But when e-cigarettes posed a new and serious threat, he sold most of that stake. That included India's ITC, which had worked well for him for two decades. But Jain felt the company was particularly threatened because it had steadily raised prices too high, causing its once-reliable growth rate to erode. ITC also faced the threat of new government tax treatment--all while its valuation had risen.
Meanwhile, top holdings demonstrate Jain's willingness to stand out. Housing Development Finance Corp gets 6.4% of assets, compared with 0.9% in the index, and PT Bank Central Asia has 4.3% of assets versus the index's 0.4%.
Performance Pillar: Neutral | Gregg Wolper 05/20/2019
When he ran strategies at Vontobel for many years, Rajiv Jain's funds often outperformed in downturns, owing to the fundamental strength of the companies in the portfolio, while lagging in strong rallies, especially if the latter were fueled by more-aggressive stocks. Thus far, that's been the pattern at this fund as well, which has led to a mixed performance record. It receives a Performance rating of Neutral.
This fund launched at the tail end of 2016, and its annualized return from then through April 30, 2019, was 11.7%. That beat the diversified-emerging-markets Morningstar Category average of 11.1% but lagged the MSCI Emerging Markets Index's return of 13.1%. However, that overall figure only tells so much. More instructive is a look at several different time periods. First, in 2017, emerging markets staged a strong rally, with the category average up 34% and the index about 36%; this fund posted huge returns, but at 32% it fell short of both measures. But when markets fell sharply in the fourth quarter of 2018, the fund lost just 3.2%, a much healthier showing than the category or index, both of which dropped around 7.5%. Those results fit the historical pattern of Jain's funds. But Jain's Vontobel funds didn't always lag in rallies, so it's encouraging for shareholders to see that in 2019, with markets reviving, this fund is outperforming; through April, it gained 14.1%, while the category and index had risen 12.3% and 12.0%, respectively.
People Pillar: Positive | Gregg Wolper 05/20/2019
Rajiv Jain has been the sole manager since this strategy's inception in 2016. His experience goes back much further, though; he had a long and successful run as a manager at Vontobel Asset Management. He managed Virtus Vontobel Emerging Markets Opportunities from May 2006 to March 2016, soon before he left Vontobel to found GQG Partners. (And he was running that strategy in other vehicles long before Vontobel received the subadvisor role on the mutual fund.) He also managed Virtus Vontobel Foreign Opportunities from February 2002 to March 2016. Both funds easily outpaced the relevant indexes and category averages over those periods.
Jain works with a staff of nine analysts, none of whom came from Vontobel. (Two others that he hired have left GQG.) Two are former investigative journalists, who look for information that conventional fundamental analysis may not uncover. (Jain had the same system in place at Vontobel.) All of the analysts are generalists, though some apply their expertise in certain regions, industries, or specific companies acquired in their previous jobs. Their experience in the investment field ranges from six to 25 years, with six of the nine in double digits, excluding one of the journalists who came to GQG straight from journalism. Two of the analysts, Sudarshan Murthy and Brian Kersmanc, were made equity partners of GQG in late 2018. The fund receives a Positive People rating.
Parent Pillar: Positive | Gregg Wolper 05/16/2019
Although young, GQG Partners has many admirable traits, earning a Positive Parent rating. It was created in mid-2016 by Rajiv Jain after he left Vontobel Asset Management. In more than 20 years there, he achieved much success, most notably in emerging-markets and international strategies. When starting GQG, Jain set limits on the size of the emerging-markets strategy to prevent it from growing too unwieldy; vowed to keep expense ratios below the relevant medians; and hired Tim Carver from a firm specializing in financing young investment firms to be CEO rather than taking that role himself.
Jain has assembled a team of nine analysts from various backgrounds. Besides Jain and Carver, seven people in the 56-person firm have been given equity stakes, including two analysts. The investment side, in the person of Jain, clearly has the most influence at this firm. The firm offers only four strategies, all using the same basic approach, and the expense ratios are indeed below median.
GQG does carry some risks. Foremost is that the firm has been created and guided by Jain, and it is his presence that explains how it amassed about $22 billion in assets in less than three years. If he were not around for any reason, that would be a serious blow. Also: even without CEO duties, he has a heavy workload. He is sole manager of all the strategies, and he is the person most clients would want to hear from.
Price Pillar: Positive | Gregg Wolper 05/20/2019
Nearly all of the assets of this fund are in the institutional shares, and the latest expense ratio for those shares, after taking into account a late-2018 reduction in fees, lands in the Below Average range when compared with other emerging-markets funds sold through the institutional channel. Therefore, this fund receives a Positive rating for Price.
Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.