Rajiv Jain’s contrarian tech bet pays off for GQG - Today's AFR
Monday fundie A move towards energy shares has been an astute play.
When the Nasdaq posted its 46th record close of 2021 a little over two months ago, Rajiv Jain could have been forgiven if he felt rattled as tech stocks continued to climb. But he knew something was amiss – and he’s been proved right.
In a contrarian move at the time, the chief investment officer of GQG Partners – the largest initial public offering on the ASX last year – had been reducing exposure to the technology sector throughout a year in which the tech-heavy benchmark surged 21.4 per cent.
‘‘We had been concerned about the frothiness in the markets,’’ Jain tells The Australian Financial Review from his office in Florida. ‘‘There were a lot of telltale signs: when there’s retail mania in most risky names, crypto, the IPO scene, retail inflows – these are all typical signs of late cycle, not early cycle.
‘‘We started shifting about a year ago, and cut back our tech exposure in every product quite meaningfully. So, it’s been our biggest reduction over the last 12 to 15 months – that’s why we underperformed a little last year.’’
GQG’s global equity strategy returned 17.13 per cent in the 2021 calendar year, according to Morningstar, compared to the Morningstar Global Markets Large Cap Index’s 18.26 per cent, net of fees.
But Jain describes last year’s underperformance as a necessary evil, to position the firm’s portfolios for a world where the technology sector is no longer considered an area of growth.
It’s a move that has already shown signs of paying off.
While GQG hasn’t yet formally announced its performance for January, Morningstar says the firm’s global equity strategy has returned 1.81 per cent year to date. This compares to a loss of 4.54 per cent for the Morning-star Global Markets Large Cap Index.
‘‘Remember what Chuck Prince said in 2007: you’ve got to dance when the party’s on,’’ Jain says. ‘‘But our view is you can’t wait till the music stops; you’ve got to make some preparations. Technology is no longer the next growth spot; it’s yesterday’s growth spot.’’
GQG Partners was the largest IPO on the ASX in 2021, raising $1.187 billion and listing with a $5.91 billion market capitalisation.
Jain co-founded GQG in 2016 with former Pacific Current Group chief executive Tim Carver. Six years on, the firm manages $US91.2 billion ($127.6 billion) across its strategies, including emerging markets, international (all markets except the US), global (all markets including the US) and US equities.
The firm’s aggressive shift away from technology has seen more capital allocated to base metals, utilities, healthcare and staples.
But Jain is most bullish on the energy sector because of the underappreciated necessity of fossil fuels in the transition to a net zero economy.
‘‘We believe the opportunity set has shifted towards some of these more capital- and carbon-heavy industries because they’re part of the solution. You need them to make the transition,’’ Jain says.
‘‘The world is actually getting more commodity intensive, not less commodity intensive.’’
It means the wave of environmental, social and governance funds that refuse to allocate capital to carbon-intensive companies could be caught out.
‘‘There’s a whole cohort of investors who just won’t touch energy because of fossil fuels. The irony is that we can’t make a transition to a cleaner, better world without energy and fossil fuels. I believe that a lot of folks that take a binary view on fossils will be challenged relatively soon.’’
Jain points to ExxonMobil as an attractive stock in the sector after the company last week posted its largest profit since 2014.
Exxon and the other major producers are generating more free cash flow than they did in 2008, when oil prices were about $US150 a barrel, Jain points out, and they’ve cut costs dramatically since then.
European banks are another area Jain likes because many of them are buying back stock in a manner he hasn’t seen in 25 years.
‘‘A lot of them are buying back stock, the dividend payouts are good, growth is picking up and the icing on the cake is if interest rates go up, there’ll be even more improvement on the margin side,’’ he says.
French bank BNP is top of the list because of its consistent growth of about 7 per cent a year for the past eight years, which Jain expects to continue or even improve as loan growth rates begin to pick up.
GQG’s global strategy’s exposure to emerging markets, except China, is the highest it’s been in years as low valuations and attractive macroeconomic conditions make the region set for a breakout.
‘‘You look at the underpinnings in countries like Brazil, India, Indonesia, Mexico and Russia, minus the geopolitical uncertainty, and things are mostly on the positive side,’’ Jain says.
‘‘These emerging markets have struggled for almost a decade, so currencies have already gone down, interest rates over the past year-and-a-half have already gone up, so they are not as far behind the curve as say the Federal Reserve seems to be.’’
While the Chinese tech behemoths held a large position in GQG’s portfolios in recent years, the firm has decided to largely avoid the tech sector in the world’s second largest economy.
‘‘I think people are overestimating the recovery potential for some of these Chinese tech businesses,’’ Jain says.
‘‘One thing people aren’t appreciating is that it’s not simply a regulation issue that will go away. The way they make money might have to be gutted and redone, and that transition may be more painful than people think.’’
Perhaps the most attractive opportunity in emerging markets is Russia, Jain says, but that opportunity comes with enormous risk given the bubbling geopolitical tensions.
‘‘The most despised market is obviously Russia, but the valuations are borderline crazy, and for good reason. We own Gazprom, which supplies 40 per cent of European gas. You would not expect a major $100 billion company to sell at three times earnings with a 20 or 25 per cent dividend yield.’’
Jain’s progression to founding the now $4.8 billion investment firm was the culmination of decades of fascination and experience in financial markets.
Born in India, he recalls his first exposure to equities was stocks his father would give him to study on summer holidays to keep him busy. This led to investments in India’s bull market when he was in high school.
After a stint at UBS, Jain joined Swiss firm Vontobel Asset Management and spent eight years there learning the ropes. The firm was hit hard by the dot-com bubble and its assets under management fell from $US1 billion to $US300 million within a few months.
This led to the resignation of Vontobel’s chief investment officer and the promotion of Jain to his first CIO role.
‘‘We lost 70 per cent of clients within a few months, so that was my welcome party,’’ he recalls. ‘‘There was no money, so I hired from back office and kind of built the team from scratch, but I wasn’t sure we were going to survive at all.’’
By the time Jain left the firm in 2016, its assets had grown to north of $US50 billion and he decided to start GQG, headquartered in Fort Lauderdale, Florida.
Fast forward to 2021 and GQG completed its IPO, with both co-founders investing the proceeds in the firm’s underlying funds alongside clients with a seven-year lock-up period.
‘‘It’s an honour and a privilege to manage someone else’s money, so we owe it to them to eat our own cooking.’’
GQG Price at posting:
$1.63 Sentiment: Buy Disclosure: Held
(20min delay)