Publications

The Road to Recovery… Black Swan Risk Ahead

Jun. 5, 2020

GQG Partners US Select Quality Equity Fund

If history tends to rhyme, investors need to rethink their equity allocation risks and factor exposures

A major crisis has occurred every 2.2 years over the last two decades, as measured by exhibit 1. As a result, crisis period navigation has played a key role in investor success. This concept is further underscored by the COVID-19 pandemic, the second “once-in-a-lifetime” market event in a decade. Top decile large cap equity mutual funds* were down 10.6 per cent in the first quarter of 2020, while the bottom decile returned -31.7 per cent, for a wide dispersion of 21.1 per cent. Such large losses are difficult to recoup, as a fund down 30 per cent would need to return 42.8 per cent to break even. Tail risk management has always been crucial, though it seems now more than ever.

The frequency of market events and heightened volatility indicate an environment where crisis periods are the new normal. Furthermore, low market visibility leaves stocks open to shocks as prices begin to rebound. It may never feel 100 per cent safe to go back in the proverbial water, and that is okay. We believe investors should instead seek risk-return optimization, focusing on strategies exhibiting both tail risk durability and upside potential (exhibit 2).

In conclusion, there have been two black swan sightings in a decade, reshaping the way many investors view risk. Crisis potential and frequency remain high amid low market visibility. Given the wide dispersion of outcomes, our opinion is investors should consider funds with a history of optimizing risk-return and effective crisis navigation. We believe portfolios should seek out quality at reasonable prices, exhibiting tail risk durability while retaining the potential for upside capture.

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*The top decile large cap equity mutual funds consist of 1158 mutual funds across the three Morningstar large cap equity categories: Large Blend, Large Growth, and Large Value.
**GQG Partners US Select Quality Equity Fund (GQEPX) is classified as a constituent of the Morningstar Large Growth Category which consists of 390 funds.

UNDERSTANDING INVESTMENT RISK

Investing involves risks, including possible loss of principal. There is no guarantee the GQG Partners US Select Quality Equity Fund will achieve its stated objective. Stock prices of small- and mid-size companies may be more volatile and less liquid than those of large companies. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from social, economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. The primary risk of participation notes is that changes in the market value of securities held by the Fund and of the derivative instruments relating to those securities may not be proportionate. Participation notes are also subject to illiquidity and counterparty risk. The Fund is non-diversified. The Fund is a newly organized entity and does not have an operating history upon which prospective investors can evaluate its potential performance.

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