All investors want portfolio managers to invest their own money in the funds they run. With around 80% of his personal wealth in his portfolios, international equity star Rajiv Jain cannot be accused of ducking this responsibility.
However, such commitment is not without its possible downsides.
‘If things don’t go well, I can explain it to clients and shareholders, but I’ll also have to explain it to my wife, which is a much more difficult conversation,’ he says.
Generally, though, when Jain is investing, things tend to go well.
He made his name running international equity funds for Swiss firm Vontobel Asset Management before departing in March of last year to start his own boutique.
He had joined the firm in 1994, rising to become chief investment officer in 2002 and then co-chief executive in 2014.
He was the sole manager on 15 funds, accounting for around $50 billion of assets, of which $30 billion was in emerging markets. For US investors he ran the Virtus Emerging Markets Opportunities and the Virtus Foreign Opportunities funds among others.
Over 10 years until his departure, the emerging markets fund was up 70.2% versus the MSCI Emerging Markets index, which returned 32.1%, and the average manager in the sector, who was up 25%.
His departure from the firm caused its shares to fall 11%, while Virtus also fell 13%.
Flexibility is key
Jain left ‘to realize his own entrepreneurial plans,’ which he delivered on with the launch of Fort Lauderdale, Florida-based GQG Partners, which stands for Global Quality Growth, in June 2016. He is chairman and chief investment officer, but deliberately not chief executive, a position taken up by investment boutique specialist Tim Carver.
‘I wanted to make sure I was not involved in anything else, except managing money, which is truly my passion,’ he says.
The firm runs three strategies: emerging markets, international and global, all of which are available as separately managed accounts.
Two of these are also available to US investors via mutual funds: the GQG Partners Emerging Markets Equity fund and the co-branded Goldman Sachs GQG Partners International Opportunities fund.
The firm signed its first client, a university endowment, in August last year and Jain says it is on course to raise $4 billion by May.
Jain says the structure of the boutique means there is no external pressure to grow assets; they have even turned down mandates of ‘a few hundred million dollars’ from institutions demanding customization, and plan to soft close the emerging markets strategy much below the $30 billion he ran at Vontobel.
‘I want to make sure we remain very flexible in every way and that there is capacity for our early backers. Let’s pencil in half [$30 billion], or less. I don’t want to give a specific number.’
Although Jain’s process and philosophy remain unchanged, the makeup of his portfolios looks very different to how they did 12 months ago.
A large-cap growth manager, Jain describes himself as a bottom-up fundamental-based stock picker, but he has a keen eye on the wider macro picture too.
He has always placed a heavy focus on valuations, an emphasis that over the last year has led him to aggressively sell off some of the sectors and countries with which he had become almost synonymous over the past five years, namely consumer staples and India.
He is concerned that there is mini-bubble building in high-quality consumer staple names, as investors ignore poor earnings growth and buy expensive stocks in response to low interest rates.
‘A lot of people are making calls on interest rates rather than being true bottom-up investors,’ he says.
‘When people talk about quality, they misunderstand and think it is synonymous with stability. So there is a lot of money that has gone into low-bearer, low-volatility sort of products, hence there is a mini-bubble in these so-called high-stability names.
‘Consumer staples is a perfect example, which I used to have a lot of. They worked very well for me but in the past year and a half I was beginning to get nervous on valuations. The fundamentals were deteriorating in global portfolio names such as Nestlé and Unilever, AmBev in Brazil, and Reckitt Benckiser.
‘If you have any sort of valuation discipline or are a truly bottom-up fundamental investor, you would have seen the fact that at Unilever over the past three years, the earnings growth has been slowing down. Even over the past five years at Nestlé there has not been earnings growth. They blame it on currency, but the fact is the underlying currency-adjusted, inflation-adjusted top line growth of Nestlé is 2.5%, but people are willing to pay 22 times, why? Because of interest rate decline.’
His exposure to consumer staples is down to 8% in his global portfolio and 12% in the emerging markets strategy, compared with 40% and 45% respectively year ago.
He believes defensive stocks, which have driven performance for him and other managers over the past five years, will hurt those who do not move away from them.
‘I am quite excited,’ he says. ‘Last year was an inflection point. For people who did well in 2013, 2014 and 2015, unless you are able to pivot away from those names, you could be in for a period of long underperformance.
‘These cycles can last five, six or seven years. It’s like tech. If you owned those names after 2001, you underperformed for years. The same thing will happen in some of these consumer names. It could be pretty painful. It will be a slow Chinese water torture.’
Although Jain was working on this thesis in December 2016, he really put things into practice in the summer of 2016 following Brexit.
‘Brexit happened and that really crystallized the strategy as there was a total panic and people were buying defensive stocks across the board while financials collapsed because of interest rate decline,’ he says. ‘But I thought: interest rate decline can’t last.’
He has rotated into financials (Goldman Sachs, Deutsche Börse and Tokio Marine) and maintains a big exposure to technology too (Facebook, Google and Chinese internet names). Despite staples being a past driver of returns, he says it is wrong to associate him with the sector and his move into financials is not his first big exposure here.
‘There is a perception that I always own staples in a big way. That is not true at all. Back in 2007 I had more than 20% in energy. Financials were a large exposure for a long time. After a lull of eight or nine years, financials are coming back. Last year, we started buying very aggressively in financials. I thought they were being given away.’
At a country level he has cut his exposure to India dramatically. He is underweight Asia as a whole in his emerging market strategy, 40% versus the index’s 70%, preferring Latin America and, most significantly, Russia.
‘We did very well with India but it is time to harvest, time to move on. I’m very excited about things in Brazil, Russia, Korea and a couple of things in Eastern Europe,’ he says.
‘Russia is the single biggest overweight today in the fund. I have been critical of Russia for a long time. I have followed Russia for 20 years and this is the first time I have gone pretty bullish on Russia.’
Buys here include Sberbank and internet company Yandex, as well as one steel company, a couple of basic materials firms and an energy company.
Jain argues Russia’s economic recession has meant companies have emerged stronger, with lower costs and less competition. Although he began buying well before Donald Trump’s election win sparked a Russia rally, he believes that fewer, or at least no more, sanctions on the country will boost these firms.
‘In Russia, there are a bunch of companies that are better off today, have undergone massive cost-cutting and… as things stabilize you will get a very significant ramp up in profits,’ he says. ‘Russia is very cheap and there are a lot of good things happening. This is not a short-term call.’
The country now accounts for 15% of the emerging markets strategy, versus the benchmark’s 4%.
After 12 months of significant change, in both his firm and his portfolios, Jain is keen stress that his discipline remains the same and that he has always looked forwards rather than backwards when running funds.
‘The only reason I have survived long term is that you can’t keep looking at history and repeating it,’ he says. ‘The problem is people extrapolate history and it is like driving a car by looking in the rear view mirror. It’s usually not a good idea.’