Over the past 20 years, the highest-quality emerging market businesses have outperformed their S&P 500 counterparts by nearly 300 basis points – and at more than 10% of today’s total global market capitalization, these companies comprise an increasingly large and fertile investment universe. If there’s anyone who knows the space, it’s Rajiv Jain, who has been investing in emerging markets for more than 20 years. In June 2016, Jain founded GQG Partners, an investment firm focused on investing in high-quality companies using a bottom-up, fundamental research-based approach with a long-term orientation. We recently sat down with Jain, who serves as GQG’s chairman, chief investment officer and portfolio manager, to discuss his investing background and approach, the role of emerging markets equities in an investment portfolio and differences they present and today’s landscape, among others.
InvestorView: Tell us about your investing background and focus on emerging markets.
Rajiv Jain: I have been investing in emerging markets stocks my entire career. My investment profession started in the early 1990s when I joined Swiss Bank Corp. as an equity analyst. In 1994, I moved over to Vontobel Asset Management as a co-portfolio manager of the Emerging Markets and International Equities strategies. In 1997, I became the portfolio manager for the Emerging Markets strategy. By 2002, I was the portfolio manager on the Emerging Markets, International and Global Equities portfolios. As my gray hair will attest, two-plus decades is a long time to be investing in emerging markets.
It is a long-held tenet of mine that in order to fully understand developed markets, it is necessary to have an equal understanding of emerging markets. From the beginning, I always have covered both developed and emerging markets. You cannot appreciate what is happening globally without some sense of where emerging markets are going. As a result, I have always structured my analyst teams to cover all markets without geographic limitations. I have no doubt that researching developed markets has made me a better investor in emerging markets and vice versa.
For example, performing thorough research on U.S. companies in the semiconductor space informs our research view on an emerging market semiconductor company. Alternatively, researching Chinese consumer stocks informs our views on European luxury goods companies that derive a significant portion of their business from the affluent Chinese consumer. Because we cover both markets, there is an invaluable cross-pollination of ideas and knowledge.
IV: Why should emerging markets be included in a wider, multi-asset class portfolio?
RJ: Today’s world is too big and developed to ignore emerging markets stocks in an equity portfolio. With the exception being the U.S., nine out of the 10 of the most populated countries in the world are now countries included in either the MSCI Emerging Markets Index or the MSCI Frontier Markets Index. My meaningful personal investment in our emerging markets strategy attests to the fact that I am a big believer in the asset class for the long term, so I’d hope investors already have some allocation to emerging stocks. While I believe that an allocation to emerging markets should be a long-term allocation decision and not a shorter-term trading strategy, I think that today’s market environment offers select emerging market equities at a very attractive entry point. Emerging markets equity valuations are trading at a significant discount to U.S. stocks on price-to-earnings terms, and many emerging market currencies have experienced weakness against the U.S. dollar. These two points – attractive valuations and weaker currencies – make for a very interesting opportunity set, and I am excited about our positions in the emerging markets portfolio.
IV: What are some other aspects of emerging markets investing that make it distinct from how you approach building, for example, a global or internationally oriented portfolio? What is the hardest thing to get right when researching and investing in emerging markets businesses?
RJ: At GQG, our approach to all our portfolios is the same: to identify and invest in high-quality businesses. The collection of these individual companies ends up as the portfolio. In other words, the considerations of what makes a good, forward-looking quality investment are often the same no matter where a company is located.
That said, we cannot ignore the world around us, meaning I approach emerging markets portfolios with a heightened sensitivity to country-specific macro factors that, at times, can overwhelm even the strongest moats companies build around themselves. You have to pay attention to which stage of the credit cycle the market is in, political risks and regulatory risks in the businesses. They can all affect returns. In our process, macro developments can, and often do, act as an off switch regarding specific investments, though never as an on switch. In other words, we’ll never buy a stock because of macro events, but we might decide to sell – or not to buy – based on macro events in a particular country.
While transparency and reporting quality have improved substantially for most large emerging market companies, some of the softer aspects of a firm are still challenging to ascertain. The fact that they are often less obvious risks makes them risks which are all the more important to understand. That is why I deploy analysts with nontraditional analyst backgrounds to help us learn things about issues such as labor relations, corporate culture, environmental responsibility and overall goodwill. These ESG (environmental, governance and social) considerations have long been deliberately built into our research process. Whether it’s our analysts with field experience as investigative journalists or our analyst with specialized accounting expertise, the varied perspectives help build our research mosaic of a company.
IV: What does an ideal GQG emerging markets holding look like? How do you define your investment style?
RJ: An ideal investment for the GQG emerging markets portfolio is a company with a strong and improving growth profile, a highly visible earnings stream, led by a capable management team and available at a reasonable, or even better, discounted price.
Our definition of quality is forward-looking and therefore different from those who would, on a backward-looking quantitative basis, own quality factors. Our aim is to exploit the long-term mispricing of assets in a market that is intensely focused on the short term and is less interested in a company’s longer-term growth prospects.
Beyond just the type of companies we invest in, I also believe portfolio construction is key to our process. I manage benchmark-agnostic portfolios that frequently vary significantly from the benchmark index. Our positions, often concentrated, reflect careful consideration of company-specific issues. My trust in our investment process and my investment team coupled with my own portfolio management experience allow us to build conviction-weighted portfolios of only our best ideas. We expect that this approach will achieve the dual objectives of achieving growth and offering some protection on the downside.
IV: You’ve been investing in emerging markets for over two decades, a time period that has included major economic crises, wars, revolutions and historic growth spurts. What about your approach to investing has allowed you to navigate these ever-changing market conditions?
RJ: As you point out, over the past two decades I’ve invested through 10 emerging markets declines of greater than 20%, three of which resulted in a greater than 50% loss for the benchmark index. In my view, great investors must have a deeply rooted philosophy with a process that contains enough flexibility to adapt to the unique qualities of each market cycle. As a result, a fundamental pillar of GQG’s philosophy is that our investment process must be adaptable, without compromising core tenets. While our commitment to investing in high-quality companies will never change, our views on market conditions, operating environments, systemic risks and relevance of certain factors must evolve.
Many investors feel like they have to predict things to outperform. However, as the old saying goes, “forecasting is hard, especially about the future,” and I think that applies to investing more than anything because markets always change. The question is more often, “How do you react?” more so than, “How well did you predict?” And if new data invalidates our investment thesis, we sell. We believe that reacting to new data is equally, if not more, important than predicting where the world is heading. In part, that’s how you survive as long as I have because you just can’t consistently predict how things are going to unfold over the long run.
IV: In founding GQG, you had the opportunity to build your own firm from scratch, with years of experience at other organizations and strategies serving as a reference point. What types of things did you emphasize or de-emphasize as crucial components when creating GQG? What is the advantage of being an employee-owned firm?
RJ: From day one, our core values as a firm have focused on client alignment and excellence. Being an employee-owned company empowers us to build a culture around those values. Our demonstrated commitment to client alignment starts with our co-investment with our clients. GQG employees get a meaningful portion of their compensation via investments in our own funds. Tim Carver, our CEO, and I have a majority of our liquid net worth invested in GQG funds. Further, we restrict personal trading, do not employ soft dollars and charge fair fees for our products.
I also believe in shared firm ownership, which is why we recently gave equity to several employees in the firm. From launch, I wanted to build a business that would continue to serve our clients well beyond the years of its founders, and we will continue to issue equity to key contributors to support that effort. At GQG, we all have a vested interest in the success of our clients, the funds and the firm, and this alignment has fostered a team-oriented, performance-driven culture.
Beyond our clients and our employees, the final responsibility the firm has is to our community. Therefore, we recently set up the GQG Partners Community Empowerment Foundation, which will help our firm contribute back to society. The more successful we are in terms of our investments and attracting great clients, the greater our impact on the community will be.
IV: This year has seen some volatility in emerging markets, with several regions entering or approaching formal bear market territory. What are your thoughts on the overall market landscape, and where are you finding the most opportunity at the moment?
RJ: Investing in emerging markets is always noisy. Even having invested in this space for as long as I have, I occasionally need to remind myself that the challenges we are seeing today – rising interest rates, a strengthening U.S. dollar, weakening emerging market currencies, political uncertainty in many countries, the potential for a trade war and so forth – are not new crises the market hasn’t seen before. Over the past 24 years, I have seen some version of this movie. That does not mean, however, that I have a playbook titled “2018” available to pull out, but rather I employ an investment approach that allows me to look for the opportunity set that this market is offering. Despite the challenging returns so far in 2018, at this point, this market does not feel like there is a broad-based crisis brewing. However, it is a market in which investors must be vigilant, as I believe certain regions and countries are susceptible to further losses. To respond to these risks, we have concentrated the geographic footprint of our emerging market portfolio with a regional overweight to Asia.
While the fears of an Asian contagion, trade wars and dollar strength have spooked the markets, the reality is not all emerging markets companies are as vulnerable to these issues as the market believes. This fear has created an abundance of opportunities for the portfolio. At the end of the day, earnings drive stock prices, and the potential growth in emerging markets remains higher than developed economies.
IV: Rajiv, thank you for your time and insights.
Prepared for Brown Brothers Harriman.
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