Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Why GQG brought tech ‘back from the bench’
As the Nasdaq ground higher and higher in 2021, GQG made an at the-time-contrarian bet: it dumped almost all of its tech exposure in favour of utilities, healthcare and energy. That bet ultimately paid off when risk crumbled in early 2022, and after sitting out what it described at the time as a valuation-led rebound almost entirely attributable to the January Effect in 2023, GQG “pretty aggressively” rotated back into tech during Q2 – just not the tech it held before.
“If you compare and contrast the tech we have now versus what we had pre-Covid, we had high price to sales names that weren’t necessarily profitable,” GQG portfolio manager Brian Kersmanc tell ISN. “I think to some extent that game is over at this point in time. Rates have gone up, cost of capital has gone up; it’s a lot harder for a Silicon Valley startup or venture capital fund to throw a billion dollars at some technology and hope that it’ll work 10 years down the line.”
“We’re bringing some players back from the bench. They’re now more reasonably priced and you’re starting to see green shoots from some of these businesses that had an element of cyclicality. Maybe people recognise that, maybe people didn’t; with ad revenue models it was always a foregone conclusion that those were secular growth stories.”
GQG still has a high single digit exposure to energy and the sector’s inclusion in the portfolio is part of its long-term thesis. It tries to take a five year view but is happy to adjust that view – and the portfolio – when the information changes (it bought Delta Airlines in late 2019 and owned it for about a month).
“We’re not here to predict an outcome; we’re here to prepare for different eventualities that could happen… If you start predicting outcomes you start trying to find all the reasons that prediction is correct,” Kersmanc says. If you’re preparing for something, and that something doesn’t happen or turns out differently, then you can adjust for it.”
The AI boom, which was ignited in part by the advent of ChatGPT and which has sent the share prices of companies working in the space soaring, is one area that’s difficult to get good visibility on.
“I think there are some areas we can play that are kind of like the picks and shovels to the goldminers out there, and whoever hits gold the picks and shovels guys are going to continue to do well – I can take a longer-term view of what that will look like,” Kersmanc said.
“For all the goldminers – some of them may get it and some of them may not. I can’t take a five year view; there’s a few pockets in these areas where I don’t know what that disruption is going to cause or who’s going to get supplanted. Some folks might get super hyped up about things in that space but I don’t know that I can make that call.”
More controversial in Australia has been its ownership of four listed Adani companies, which it bought following the publication of a short report which wiped hundreds of billions from those companies’ prices. GQG won’t mention individual stocks – it would require them to put a freeze on trading them – but it’s “very favourable on the Indian market overall” now that it’s gone through a massive deleveraging process at the government, corporate and consumer levels and is rolling out more business-friendly policies.,
“There are companies that are going to benefit from that – the banking system, and then other things that fall in infrastructure, materials and utilities where you’re getting very high levels of growth with long duration of earnings visibility,” Kersmanc says. “Yes, the Indian market operates a little bit differently than some other markets and that’s where having that EM experience in our past helps us get comfortable with some of those things.”
