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Concentrated Global Equity Strategy 2Q 2021 Commentary

Jul. 15, 2021

“A thoughtful investment process contemplates both probability and payoffs and carefully considers where the consensus, as revealed by a price, may be wrong” — Michael Mauboussin, Expectations Investing

Like most things in life, writing quarterly commentaries has its plusses and minuses. On the plus side, it is a great tool to communicate with all of you and share some insight into how we’re thinking about the world. However, on the minus side, one fraction of a year tells us very little about returns that are forecast to be delivered over several decades. So, while every small chunk of time always has an element of noise, some quarters just seem to be noisier than others.

On the bright side, a handful of things played out better for us during this quarter than the prior two. In homage to our first quarter message, perhaps quality was in fact — “on sale?”

During the quarter, contributors to performance were broad-based and indicative of our more bar-belled portfolios, balancing sectors like technology and communication services with more cyclical areas such as materials and financials. We also saw a higher degree of breadth across equity markets: on a sector basis, every sector is positive on a year-to-date basis whereas last calendar year, several sectors were negative, like energy and financials.

While we believe many sectors are currently performing well, as denoted by an increase in price, it is important to remember that not everything is worth owning. We continue to remain very selective and focused on the underlying fundamentals of our portfolio companies across the globe. While this has been a noisy quarter, this noise has allowed us to uncover some less obvious sources of forward-looking quality. Below, we will highlight some of those examples we came across during the quarter.

AN EXPECTATIONS FRAMEWORK

Last quarter, we highlighted the reality of large, unexpected events that can cause a whole host of problems, which can then be exacerbated by the way our brains process information. This quarter, the world ventured beyond the unexpected things in reality, going straight into the imaginary, with someone paying around US$18,000 for a “sculpture” that literally does not exist, as highlighted nicely in Exhibit 1.i

Now, it is hard to pin a cause on everything, and it is even harder to pin a cause on individual motivations. It is puzzling to us what value the buyer saw (pun intended) in the white space of the suggested placing area, but as we are always looking for insights, maybe there is something to be gleaned here in the white space.

There is a two-dollar phrase called stochastic resonance that is often deployed in statistical filtering. While we don’t need to overly focus on all of the applications of “randomness,” it is an important concept that is often misunderstood. We kicked this off, as we often do, underscoring how noisy short-term periods can be. What stochastic resonance refers to is when noise can actually illuminate the signal. Whether that noise comes from short-term periods or headlines around invisible sculptures, maybe the best way to highlight signal is through contrast. In Exhibit 2, we have highlighted consensus analyst expectations for one of the largest global hotel franchises by market cap, combined with both 5-year forward price-toearnings (P/E) ratios and price returns. The top chart highlights analyst estimates for the next four fiscal years (2021 inclusive), while showing what 2021 expected earnings were just 18 months ago. Think about this: just 18 months ago, this company was expected to earn more than US$7 per share in the current year. Now they are expected to earn roughly 30 per cent of that. In fact, estimates show this company is not expected to earn in excess of US$7 per share until the end of 2024. Now, look at the chart on the bottom of Exhibit 2. The orange line reflects the current price while the green line reflects the forward P/E for this company. While expectations for earnings declined and were kicked three years out, the price is basically at three-year highs! So, investors are paying an all-time high price, for all-time highs, in earnings uncertainty. Therefore, it should not be surprising that we have avoided these types of situations, which, in our opinion, are not unique to this company but in fact illustrative of a broader theme, of “pull forward” returns for certain cyclical, fully-loaded, reflation themes.

Contrast Exhibit 2 with Exhibit 3. Exhibit 3 is an area that we like quite a bit and is not commonly frequented by a quality growth manager — iron ore. We believe the setup for select companies in the iron ore space, where the largest producers control more than two-thirds of global production, is the opposite of Exhibit 2. Notice that while this iron ore producer has seen price appreciation, the company’s forward P/E has fallen substantially. Not only that, free cash flow (FCF) margins for the company are roughly 30 per cent, which is in software industry FCF margin territory. This is certainly unexpected for a company in the physical world with real costs and real machines. Unlike invisible sculptures, there is nothing imaginary here. While there is no doubt that this industry is full of noise and complexities, the supply/demand argument is compelling. In our opinion, even if spot iron ore prices were to retreat from their recent highs (a very possible scenario), FCF margins in Exhibit 3 are likely to remain in the mid-teens. Not bad for a company that posted near-zero FCF margins five years ago and once again, in our view, an illustration of our forward-looking quality approach.

Lastly, the expectations framework is not unique to iron ore, as depicted in Exhibit 4. In our non-US strategies, our allocation to emerging markets, particularly Brazil and Russia, have increased, generally at the expense of our China exposure. Why is this the case? We have always said earnings are like gravity — it matters — even if it is a bit cyclical! As evidenced in Exhibit 4, though in our view there is no doubt the world is full of “money printers going BRRRR,” we have another take on this where the B and the R represent Brazil and Russia. While we are not trying to resurrect the old BRICs moniker, it is impressive to see that the cumulative earnings growth over the last five years for Brazil has now surpassed that of China, with Russia not too far behind. Therefore, while China garners all of the headlines (for better or worse), once again noise has helped highlight the signal: bottom-up company fundamentals in both Brazil and Russia are far better, in our opinion, than many market participants are giving them credit for.

Does any of this guarantee that next quarter, next year, or the next five years will play out positively for our strategies? Of course not. Do we think that based on market expectations our global forward-looking quality approach gives us a higher likelihood of being correct than more dogmatic approaches? We do. Regardless, we continue to sift through the data (noise included) to find the signal, wherever it exists

During the second quarter of 2021, the GQG Partners Concentrated Global Equity Strategy’s Composite outperformed the benchmark MSCI ACWI (Net) by 634 basis points net of fees, posting a total net of fees return of 13.73 per cent versus the benchmark’s 7.39 per cent return (see Exhibit 5).

Among the largest contributors to relative performance during the quarter were stock selection in the United States and both the information technology and materials sectors.

The largest negative contributors to relative performance during the quarter included stock selection in China, an overweight to Spain, and an underweight within the information technology sector.

Contributing holdings over the second quarter included:

  • NVIDIA CORP
    Nvidia is the leading designer of graphics processing units that enhance the experience on computing platforms. The firm’s chips are used in a variety of end markets, including high-end PCs for gaming, data centers, and automotive infotainment systems. During the quarter, the company continued to benefit from positive momentum in the GPU market.
  • ALPHABET INC
    Alphabet dominates the online search market with Google’s global share above 80%, via which it generates strong revenue growth and cash flow. Google’s ecosystem strengthens as its products are adopted by more users, which was aided by the pandemic, making its online advertising services more attractive to advertisers and publishers and resulting in increased online ad revenue. During the quarter, the company continued to see positive momentum in its underlying business segments.

Detracting holdings over the second quarter included:

  • ABBOTT LABORATORIES
    Abbott manufactures and markets medical devices, adult and pediatric nutritional products, diagnostic equipment and testing kits, and branded generic drugs. During the quarter, management cut 2021 EPS guidance due to a softening in demand for Covid-19 PCR testing.
  • PING AN INSURANCE GROUP
    Headquartered in Shenzhen and founded in 1988, Ping An Insurance is an integrated financial service provider, with a focus on life insurance and property and casualty insurance. During the quarter, Ping An, and Chinese financial services companies more broadly, struggled due to receding bond yields.

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DEFINITIONS

Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company.
Price-to-earnings (P/E) is the ratio of a company’s share price to the company’s earnings per share.
Free cash flow (FCF) is the monetary value of cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

END NOTES
ihttps://news.artnet.com/art-world/italian-artist-auctioned-off-invisible-sculpture-18300-literally-made-nothing-1976181

 

Concentrated Global Equity Composite includes all fully discretionary institutional portfolios, with consistent investment parameters, that invest in a portfolio of only approximately 20 equity investments in companies whose securities are principally traded in, or whose principal revenues, operations or business risk are attributable to, in the aggregate across the entire portfolio, at least 4 countries. For comparison purposes, the Composite is measured against the MSCI All Country World Index (net of withholding taxes). Returns include the effect of foreign currency exchange rates. The Concentrated Global Equity Composite was created June 1, 2016 with an inception date of December 1, 2015.

GQG Partners LLC claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. GQG has been independently verified for the periods June 1, 2016 through December 31, 2020. The verification report(s) is/are available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards.

Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firmwide basis. Verification does not provide assurance on the accuracy of any specific performance report.

GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

GQG Partners LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. The firm maintains a complete list and description of composites, which is available upon request. The firm’s list of pooled fund descriptions for limited distribution pooled funds is available upon request. The firm’s list of broad distribution pooled funds is available upon request.

Performance presented prior to June 1, 2016 was achieved prior to the creation of the firm. The account is a personal account of the Portfolio Manager who was the only individual responsible for selecting the securities to buy and sell. The prior track record has been reviewed by Ashland Partners & Company, LLP and conforms to the portability requirements of the GIPS standards. On June 28, 2017, ACA Performance Services, LLC acquired the investment performance service business of Ashland Partners & Company, LLP.

The US dollar is the currency used to express performance. Returns are presented both gross and net of management fees and include the reinvestment of all income. Gross and Net performance are calculated after the deduction of actual trading expenses and other administrative fees (custody, legal, admin, audit and organization fees). Net returns are calculated using the highest/model rack rate fee. Gross and Net performance are net of foreign withholding taxes.

The investment management fee schedule for the Composite is 0.70%. Actual investment advisory fees incurred by clients may vary.

Policies for valuing investments, calculating performance, and preparing GIPS composite reports are available upon request. GQG Partners calculates asset-weighted standard deviation. Past performance is not indicative of future results.

IMPORTANT INFORMATION

The information provided in this document does not constitute investment advice and no investment decision should be made based on it. Neither the information contained in this document or in any accompanying oral presentation is a recommendation to follow any strategy or allocation. In addition, neither is a recommendation, offer or solicitation to sell or buy any security or to purchase of shares in any fund or establish any separately managed account. It should not be assumed that any recommendations made by GQG Partners LLC (GQG) in the future will be profitable or will equal the performance of any securities discussed herein. Before making any investment decision, you should seek expert, professional advice, including tax advice, and obtain information regarding the legal, fiscal, regulatory and foreign currency requirements for any investment according to the law of your home country, place of residence or current abode.

This document reflects the views of GQG as of a particular time. GQG’s views may change without notice. Any forward-looking statements or forecasts are based on assumptions and actual results may vary.

GQG provides this information for informational purposes only. GQG has gathered the information in good faith from sources it believes to be reliable, including its own resources and third parties. However, GQG does not represent or warrant that any information, including, without limitation, any past performance results and any third-party information provided, is accurate, reliable or complete, and it should not be relied upon as such. GQG has not independently verified any information used or presented that is derived from third parties, which is subject to change. Information on holdings, allocations, and other characteristics is for illustrative purposes only and may not be representative of current or future investments or allocations.

The information contained in this document is unaudited. It is published for the assistance of recipients, but is not to be relied upon as authoritative and is not to be substituted for the exercise of one’s own judgment. GQG is not required to update the information contained in these materials, unless otherwise required by applicable law.

The contents of this document are confidential and intended solely for the recipient. No portion of this document and/or its attachments may be reproduced, quoted or distributed without the prior written consent of GQG.

GQG is registered as an investment adviser with the U.S. Securities and Exchange Commission. Please see GQG’s Form ADV Part 2, which is available upon request, for more information about GQG.

Any account or fund advised by GQG involves significant risks and is suitable only for those persons who can bear the economic risk of the complete loss of their investment. There is no assurance that any account or fund will achieve its investment objectives. Accounts and funds are subject to price volatility and the value of a portfolio will change as the prices of investments go up or down. Before investing in a strategy, you should consider the risks of the strategy as well as whether the strategy is suitable based upon your investment objectives and risk tolerance.

There may be additional risks associated with international and emerging markets investing involving foreign, economic, political, monetary, and/or legal factors. International investing is not for everyone. You can lose money by investing in securities.

Unless otherwise indicated, the performance information shown is unaudited, pre-tax, net of applicable management, performance and other fees and expenses, presumes reinvestment of earnings and excludes any investor-specific charges. All past performance results must be considered with their accompanying footnotes and other disclosures.

Past performance may not be indicative of future results. Performance may vary substantially from year to year or even from month to month. The value of investments can go down as well as up. Future performance may be lower or higher than the performance presented, and may include the possibility of loss of principal. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of securities listed herein.

Actual returns will be reduced by the advisory fees and any other expenses that may be incurred in the management of any investment advisory account or fund. Fees may be modified or waived for certain investors. Please refer to Part 2A of GQG’s Form ADV for a complete description of GQG’s customary investment advisory fees. Refer to the offering memorandum or prospectus of a fund advised by GQG for a description of fees and expenses associated with it. An investor’s actual performance and actual fees may differ from the performance information shown due to, among other factors, capital contributions and withdrawals/redemptions, different fund share classes and eligibility to participate in “new issues.” Certain investment strategies and fund share classes may be closed, including any share class from which performance shown has been derived.

INFORMATION ABOUT REPRESENTATIVE ACCOUNTS

Portfolio characteristics, portfolio holdings, sector allocation, country allocation, ROE and market capitalization are based on a representative portfolio, which is the account in the composite that GQG believes most closely reflects the current portfolio management style for this strategy. Performance is not a consideration in the selection of the representative portfolio. The information for the representative portfolio shown may differ from that of the composite. The top ten holdings identified and described do not represent all securities purchased, sold, or recommended for clients in the composite and no assumption should be made that such securities or future recommendations were or will be profitable in the future. Portfolio holdings are subject to change without notice. Although the country allocations shown reflect the country of domicile of the securities in the portfolio, GQG’s portfolios are constructed based on GQG’s assessment of each issuer’s country of risk exposure rather than on its country of domicile. GQG assesses the country’s economic fortunes and risks to which it believes the issuer’s assets, operations and revenues are most exposed by considering such factors as the issuer’s country of incorporation, actual physical location of its operations, the primary exchange on which its securities are traded and the country in which the greatest percentage of its revenue is generated.

INFORMATION ABOUT BENCHMARKS

MSCI benchmark returns have been obtained from MSCI, a non-affiliated third-party source. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing, or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

The MSCI All Country World (Net) Index (MSCI ACWI) is a global equity index, which tracks stocks from 23 developed and 27 emerging markets countries. Developed countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK, and the US. Emerging markets countries include: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates. With 2,975 constituents (as of June 30, 2021), the index covers approximately 85% of the global investable equity opportunity set. The MSCI Brazil Index (USD) is designed to measure the performance of the large and mid cap segments of the Brazilian market. The MSCI China Index (USD) captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips, and foreign listings (e.g. ADRs). The MSCI Russia Index (USD) is designed to measure the performance of the large and mid cap segments of the Russian market. Net total return indices reinvest dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to nonresident institutional investors who do not benefit from double taxation treaties.

Information about benchmark indices is provided to allow you to compare it to the performance of GQG strategies. Investors often use these well-known and widely recognized indices as one way to gauge the investment performance of an investment manager’s strategy compared to investment sectors that correspond to the strategy. However, GQG’s investment strategies are actively managed and not intended to replicate the performance of the indices; the performance and volatility of GQG’s investment strategies may differ materially from the performance and volatility of their benchmark indices, and their holdings will differ significantly from the securities that comprise the indices. You cannot invest directly in indices, which do not take into account trading commissions and costs.

NOTICE TO AUSTRALIA & NEW ZEALAND INVESTORS

GQG Partners LLC (“GQG”) is an authorised representative (number 001283168) of GQG Partners (Australia) Pty Ltd, ACN 626 132 572, AFSL number 515673. This document and our services may only be provided to wholesale clients (as defined in section 761G of the Corporations Act 2001 (Cth)) domiciled in Australia. This document contains general information only, does not contain any personal advice and does not take into account any prospective investor’s objectives, financial situation or needs. In New Zealand, any offer of a Fund is limited to ‘wholesale investors’ within the meaning of clause 3(2) of Schedule 1 of the Financial Markets Conduct Act 2013. This document is not intended to be distributed or passed on, directly or indirectly, to any other class of persons in Australia and New Zealand, or to persons outside of Australia and New Zealand.

NOTICE TO CANADIAN INVESTORS

This document has been prepared solely for information purposes and is not an offering memorandum nor any other kind of an offer to buy or sell or a solicitation of an offer to buy or sell any security, instrument or investment product or to participate in any particular trading strategy. It is not intended and should not be taken as any form of advertising, recommendation or investment advice. This information is confidential and for the use of the intended recipients only. The distribution of this document in Canada is restricted to recipients in certain Canadian jurisdictions who are eligible “permitted clients” for purposes of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

NOTICE TO SOUTH AFRICAN INVESTORS

Investors should take cognisance of the fact that there are risks involved in buying or selling any financial product. Past performance of a financial product is not necessarily indicative of future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. The investment value of a financial product is not guaranteed and any Illustrations, forecasts or hypothetical data are not guaranteed, these are provided for illustrative purposes only. This document does not constitute a solicitation, invitation or investment recommendation. Prior to selecting a financial product or fund it is recommended that South Africa based investors seek specialised financial, legal and tax advice. GQG PARTNERS LLC is a licensed financial services provider with the Financial Sector Conduct Authority (FSCA) of the Republic of South Africa, with FSP number 48881.

NOTICE TO UNITED KINGDOM INVESTORS

GQG Partners is not an authorised person for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (“FSMA”) and the distribution of this document in the United Kingdom is restricted by law. Accordingly, this document is provided only for and is directed only at persons in the United Kingdom reasonably believed to be of a kind to whom such promotions may be communicated by a person who is not an authorised person under FSMA pursuant to the FSMA (Financial Promotion) Order 2005 (the “FPO”). Such persons include: (a) persons having professional experience in matters relating to investments; and (b) high net worth bodies corporate, partnerships, unincorporated associations, trusts, etc. falling within Article 49 of the FPO. The services provided by GQG Partners and the investment opportunities described in this document are available only to such persons, and persons of any other description may not rely on the information in it. All, or most, of the rules made under the FSMA for the protection of retail clients will not apply, and compensation under the United Kingdom Financial Services Compensation Scheme will not be available.

GQG Partners (UK) Ltd. is a company registered in England and Wales, registered number 1175684. GQG Partners (UK) Ltd. is an appointed representative of Sapia Partners LLP, which is a firm authorised and regulated by the Financial Conduct Authority (“FCA”) (550103).

© 2021 GQG Partners LLC. All rights reserved. Data and content presented is as of June 30, 2021 and in US dollars (US$) unless otherwise stated. CGE 2Q21QC (exp. 31-OCT-21)

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