In March, GQG Partners won the Global Equities Category at the 2023 Morningstar Awards. The fund delivered total annual returns of 0.8% against the benchmark of -12.4% in 2022. The stellar outperformance came from a large bet on energy stocks and a significant underweight in tech names.

GQG was famously bearish on tech through much of 2021–22 as it believed a massive capital cycle would unwind in the sector, resulting in large stock losses. It was proven correct, and its Global Equity Fund (ETL7377AU) benefited handsomely.

Now the fund has changed its view on the tech sector. As at the end of April, it has a 23% weighting in global technology, about 2% above the benchmark weight. Just two months earlier, the fund had just 2% of its portfolio in the tech sector.

Conversely, it’s cut back on energy exposure, from 26% of the fund portfolio last October, to 15% at the end of last month. It’s also reduced holdings in the financials sector, from 28% in October 2022, to 13% this April.

GQG Portfolio Holdings

GQG portfolio holdings

Source: Morningstar Direct

Rajiv Jain explains the switch in tech

GQG Partners’ CIO Rajiv Jain told the Morningstar Investment Conference in Australia on Tuesday that the tech sector today is different to 2021.

“…if you look at 2021 tech, it was much more about long duration companies, in the worst businesses, that were not profitable but were expected to be profitable over the next 5, 10 years… now, the mega caps are pretty reasonably valued because they have real earnings there, they have real cashflow, a lot of them are buying back stock, they are also cost cutting to improve profitability, so it’s actually a different market versus the frothiness that you saw in 2021," he says.

GQG Partners CIO Rajiv Jain

GQG Partners CIO Rajiv Jain spoke at the 2023 Morningstar Investment Conference. Picture: Morningstar

Jain says the mega cap tech companies are quality franchises that were overvalued in 2021 and have now come back to more sensible prices. He cites Alphabet (GOOG), which is still down about 40% from its peak and is trading at mid-teens earnings multiples.

Jain believes artificial intelligence (AI) will be revolutionary and the large cap names are likely to be winners from this revolution. He says there are 400 AI startups and it’s impossible to pick who will be the ultimate winner. Yet it does seem to him that the larger companies should do well from it, especially in an environment of higher interest rates, which make it harder for startups to get off the ground and scale.

Systemic financial crisis 'unlikely'

On the financial sector, Jain told the conference that the global banking system seems in good shape, and he doesn’t think there’ll be a systemic crisis. He sees recent bank troubles as symptoms of excesses in tech and Wall Street rather than being a sign of broader troubles.

His fund owns some European banks, and he’s also upbeat on emerging market banks, especially in India, Brazil, and Indonesia. He says emerging markets have more traditional commercial banks, versus investment banks. And Jain thinks banks in these markets have structural tailwinds, making them less vulnerable to credit cycle downturns.

Why Chinese state-owned enterprises are 'enticing'

Jain doesn’t expect consumption to lead any Chinese economic recovery. He says the market senses this as Chinese banks and industrials are near 52-week highs, whereas consumer discretionary stocks hover near year-long lows.

Jain isn’t fond of Chinese tech names such as Tencent (TCEHY) and Alibaba (BABA) on valuation grounds. He believes these tech names are like utilities now given Chinese government intervention in the tech sector. However, they aren’t yet being priced like utilities.

Jain’s contrarian take is that Chinese state-owned enterprises (SOEs) offer more enticing investments. He says regulatory changes are creating better alignment between these companies and shareholders, and many SOEs are cheap, trading at 5–7x earnings.

He notes though that he’s still significantly underweight China and has no exposure in his global fund.

Bullish on Brazil and India

Jain views Brazil as ‘exceedingly attractive’. At a macro-economic level, it’s in much better shape than most developed markets. It has a fiscal deficit of just 1.5%. It didn’t increase debt during Covid, unlike almost all other countries. Brazil’s banking system is healthy, inflation is coming down, and interest rates are too high.

Jain suggests that Brazil moves in cycles, and the current one is turning upwards:

“It’s a classic case where bad markets lead to good government policy, and good markets lead to bad government policy," he says.

He says in 2012, good stock markets led to poor policy. Today, that’s switched, and that should lead to positive outcomes for investors, especially when the Brazilian market is valued at just 6–7 earnings.

On India, Jain’s take is that the current Prime Minister is the most competent in decades. He’s made doing business in India easier, he’s delivered on infrastructure projects and the bank system is healthy compared to five years ago.

He isn’t finding value in high-profile Indian sectors such as IT or consumer, but more in financials and infrastructure.

On his contrarian bet on Adani, Jain believes the Indian company is one of the best port and rail operators in the world, has world-class assets, and doesn’t appear to have any major governance issues. GQG acquired nearly $2 billion worth of shares in four Adani companies in March.

The Indian conglomerate saw its value plummet following a scathing US short-seller report in January, although shares in Adani companies have soared in recent days as a panel appointed by India's Supreme Court was unable to conclude any regulatory failure around the allegations.  

Positive on US, worried about Europe

Jain is bullish on the US. He says the country has some of the world’s best corporates, it’s easy to do business there, and it will benefit from an emerging infrastructure boom.

He’s much more worried about Europe. Jain says there’s been a structural under-investment in energy on the continent and there could be oil shortages and oil price spikes in future. And he believes current government policies are making the situation worse.

Jain also points to a lack of growth in Europe. For instance, per capita incomes in most of Europe have been stagnant for the past 18 years. Meanwhile, debt levels have exploded.

Addressing ‘style drift’

Jain knows that major changes in portfolio positioning can result in investor questions about the fund’s investment style and objectives. He defends the recent portfolio changes, saying he has a track record of changing views when investment fundamentals alter.

He says there are good times to be invested in certain sectors and bad times, and a good manager shouldn’t be fixed in their viewpoints.

GQG Partners Global Equity fund is silver rated by Morningstar.

Despite some caveats, Morningstar director of manager research Michael Malseed says GQG's "logical approach" and its manager’s ability to "successfully navigate the territory earns our strong conviction".

"Lead portfolio manager Rajiv Jain describes his approach as "quality-growth," seeking companies with a strong market position, a record of prudent capital allocation, and a history of weathering tough economic conditions," he says.

"Jain isn’t afraid of making aggressive portfolio changes if the fundamentals change, so investors should be prepared to see very high turnover at times. This approach has allowed the strategy to weather tough times in the market better than the indexes and most peers. The fee is very competitive at 0.75% per year with no performance fee." 

But he notes this approach is not without risk.

"Top holdings routinely take up 5%–6% of assets, and country weights can vary significantly from the index's. This strategy entered 2022 with a 6.2% allocation to Russia, which could have derailed returns had Jain not sold most of it in the weeks prior to Russia’s invasion of Ukraine."