“Hold your views, but hold them lightly”: Fast-growing GQG Partners on the art of devil’s advocacy in asset management
In a year when many money managers were losing ground, Florida-based outfit GQG Partners were able to double assets under management to USD62 billion.
GQG was launched in June 2016 by veteran emerging markets manager Rajiv Jain, formerly of Vontobel Asset Manager.
The firm’s strategies include global equities and US equities, but its emerging markets equity strategy showed a standout run of returns in 2020, ranking as one of the best performing funds in October according to Morningstar.
Assets also grew on account of net client inflows of USD18.2 billion in the first nine months of the year, as the firm expanded its institutional investor base beyond the US to include UK, Australia, Japan, continental Europe and the Middle East.
According to the firm’s chief executive, Tim Carver, GQG owes its recent success to adaptability above all.
“We entered the year perfectly poorly positioned for pandemic,” says Carver. At the start of the year, GQG was invested in airlines, banks and “a bunch of things that that obviously did not fare well”.
“But we quickly adapted, and moved the portfolio into other names, and as a result were able to withstand the challenges that came with the pandemic.” These included companies in the internet and healthcare sectors.
The firm’s founder, Jain, has a mantra: “Hold your views, but hold them lightly”. As an investment philosophy, this puts the emphasis on flexibility and being reactive to new data, says Carver, instead of subscribing rigidly to an investment style, such as growth or value.
Value fund managers look for under-priced stocks that they expect will recover their value in the future, while growth funds focus on companies that will outpace their peers.
The gap between value and growth stocks widened to a 25-year high in 2020. While the Russell 1000 Growth index shot up by 36.4 per cent in the year to the end of November, the Russell 1000 Value index barely even budged – offering returns of only 1.7 per cent.
Nevertheless, investor sentiment towards value shares has shifted over the course of the pandemic, with the discovery of a vaccination triggering a rotation back into more cyclical shares that are likely to benefit most from the restart of economic activity.
But Carver considers value and growth to be ultimately “joined at the hip”, stating: “No investor says: ‘I want to buy a really expensive company that's not going to grow at all.’ All investors are looking for some sense of value, of course, with what they're buying.”
The value-growth dichotomy is an increasingly outdated way to think about investing, in Carver’s view. “We have a historical institutional legacy of having these so-called style boxes, and there are legacy managers who manage their portfolios very, very tightly to some tracking error to an index that's representative of that style box.
“I believe that's going away. I think that the market is far too sophisticated to say that we're simply going to adhere slavishly to some tight tracking error to a preordained index.”
In practice, GQG plumps for ‘quality’ stocks, which generally gives the firm a small bias towards growth.
But the firm’s skeptical take on asset management norms is grounded in a broader company culture of “devil’s advocacy”, which executives say is the key to outperforming rival managers.
Two or three analysts are assigned to examine each idea in a portfolio, with one assigned to build the positive case for investing, while the other plays the ‘devil’s advocate’.
This practice goes to counteract what Mark Barker, international managing director, calls the “most powerful and potentially the most dangerous bias out there”, confirmation bias. This predisposes everyone to give too much weight to data that supports their beliefs, and ignore evidence that runs contrary.
“If, when you are getting constructive on a name, you have a member of the team whose job has been to go out and build the bear case, that means that you also have the bear thesis sitting right there. So, when you have data that comes in that is supportive of that bear thesis, your confirmation bias can start to work for you, rather than against you,” says Barker.
The second part of this process is GQG’s practice of employing former investigative journalists to dig into a potential investee company’s culture and governance by talking to everyone from ex-employees to regulators, trade unions, and suppliers.
They aim for this to be done “in a vacuum” outside of the influence of Wall Street analysts, to gain an objective measure of a company. “Everyone has the job of challenging a prevailing view, whether that's a former journalist or another analyst.”
“More often than not, it doesn't end up with us walking away from a trade,” says Barker, adding that the practice has more to do with GQG being long-term investors. “We’re very long-term oriented in terms of in terms of our underwriting process, and when we buy companies, our view is we would like to be able to hold them for many, many years.”
Occasionally, though, companies do lose their sheen under closer inspection. Barker mentions a firm in the hospitality sector that GQG walked away from after discovering previous criminal charges that existed against the management.
According to Carver, the asset management world is more competitive than Silicon Valley, the NFL and the Premier League. “This is the most competitive business in the world,” he says.
And there are no prizes for middle-of-the-pack performance, unlike in some other industries. “People may say, for example, ‘I don't need to have a Ferrari, I’m happy to have an average car’. Well, in our business, there is no value to being average, because investors can get market average returns effectively for free,” explains Carver.
In such a competitive landscape, Carver says it is essential to keep employees incentivised and motivated. In addition to the company being 95 per cent employee-owned, every worker will be personally invested in its strategies as part of the compensation scheme.
Earlier in the year, GQG’s management also rolled out a striking series of pandemic-proofing measures, designed to minimise the effect of Covid-19 on the workforce.
“When the pandemic hit in April, we advanced all of our employees’ year-end bonuses, to be paid at the end of April, and we told everybody, nobody's bonus will go down from the prior year. We also said, nobody's going to get laid off this year,” says Carver.
They also handed out a USD10,000 grant to each employee, that was invested in its global equity strategy, which they would receive in five years’ time.
This has not been the norm in the investment industry. Financial institutions including Invesco, Goldman Sachs, and Credit Suisse have all announced lay-offs this year.
According to a report by compensation consultant Johnson Associates, asset managers’ incentives are likely to fall as much as 15 per cent this year, as well as cutting up to 10 per cent of their workforce.
But at GQG, freeing employees from the burdens of employment anxiety and financial strain allowed the team to hold onto its momentum.
“We wanted to take all the financial risk off the table for them personally, so that they could focus on clients as the hyper-focus, being very competitive and serving our clients better than anybody else,” says Carver.
“The way to do that is by taking care of your employees so they can take care of the clients.”