Global Quality Growth

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  • 13 mins 45 secs
Rajiv Jain sat down with us to talk investment style, how he defines quality & what makes banks such an attractive proposition.


Alliance Trust PLC

Alliance Trust PLC
River Court
5 West Victoria Dock Road

Phone: 01382 938320

PRESENTER: Rajiv Jain is Fund Manager and CIO at GQG Partners. He joins me now. Rajiv, give us a quick summary of your investment style.

RAJIV JAIN: Yes, GQG stands for Global Quality Growth, and growth not as a style but growth of capital. So our objective is to compound all our clients’ money over the long run. And what we try to do is find businesses which have high barriers to entry. We feel they’ll be around for the long run and they have a tremendous runway in front of them; in other words headroom. Because headroom ultimately dictates what you should pay for them, so we want to buy businesses which have some of these characteristics, and we can take a longer-term view whether it’s developed markets or emerging market because as you know we do both.

PRESENTER: How do you define quality?

RAJIV JAIN: Everybody defines quality a different way. So when we talk about quality, businesses which have good balance sheet, high barriers to entry, good management and management that have taken care of minority shareholders and have a long runway in front of them. And the last one I think is incredibly important because quality can do a backward looking quality or a forward looking quality and that clearly is a key longer-term differentiator.

PRESENTER: Have you got an example of backward quality where if you’d picked up on that as a signal you could have gone quite badly wrong?

RAJIV JAIN: Well, if you look for example Kraft, you know, which is owned by Warren Buffet in a big way and fairly widely owned, some of those food products basically are, packaged food products are now are kind of in decline. I mean the world has moved away from them. So that would be backward looking quality, versus other staples, you know, could find other staples which have actually done well and will continue to reinvent themselves or evolve into more sort of healthier products and so on and so forth. So that’ll be different between what used to be quality but no longer is quality.

PRESENTER: And how important is valuation on a stock?

RAJIV JAIN: Valuation is important, but I think when we talk about valuation we are talking about valuation dependent on the growth rates, the long runway in front of them, and so on and so forth. So it is not purely multiple based because a business which could be selling at 10 times earnings could be incredibly expensive, while 20 times earnings could be very cheap. So I think it’s dependent on the runway in front of them, the barriers to entry, rather than purely simple looking at multiples.

PRESENTER: So does that mean you have to spend quite a bit of your time after making an investment just checking that those growth rates on the company are coming through?

RAJIV JAIN: Yes actually not so much growth prediction; it’s much more about whether the fundamentals are changing in the positive or negative there. So there’s actually lot less modelling dependent; it’s much more about how businesses are developing. So in other words we tend to be much more business analysts than stock analysts. So we pay a lot of attention to culture for example. We pay a lot of our attention to regulation and the changing the business, you know, the business as such, if the barriers seem to be going up, because sometimes regulation can increase barriers, while other times it can lower barriers, so I mean there’s some incredibly good businesses or incredibly good businesses which are no longer as good. So I think that’s where we spend bulk of our time on, rather than purely saying gee the growth rate is 12% or 13%.

PRESENTER: There’s a lot happening in the political and the macroeconomic environment right now from Brexit to Trump trade wars with China, how’s that impacting on how you look at the stocks in your portfolio?

RAJIV JAIN: So, it’s interesting, most bottom-up managers would say well it is what it is, you know, we pick stocks. Our view is that stocks, we pick stocks, but the second part is what is the macro impact on the businesses? So we actually are kind of macro aware. But macro is a risk management tool, rather than we’re not looking for good macro conditions but how would the macro impact as a risk generator for the companies we own or we like? So for example if you own a Chinese company which is dependent on higher end semi-conductor chips for their business, well if the US stops exporting chips to them, the business could be significantly impacted. So is it macro or micro?

So we feel, in fact last 12 to 18 months we’re spending an incredible time on, especially in the trade war, less than Brexit, but that’s got a lot more difficult to call. But on the trade war side we spend quite a bit of time because some of the businesses we own or we could have owned have meaningful implications, you know, depending how it goes.

PRESENTER: One of the holdings at the moment is Intercontinental Exchange. What is it, why do you like it so much?

RAJIV JAIN: So Intercontinental Exchange is, as the name suggests, it’s an exchange of bunch of different things. For example they also own the New York Stock Exchange, but they own some of the crude oil futures. They trade on them, you know, fixed income derivatives. So the beauty of some of these businesses that there’s a huge network effect: you’re not going to trade somewhere else because you can trade somewhere cheaper because the liquidity begets liquidity. But also they benefit from higher volatility. If interest rates go up or down, it doesn’t really matter for them, it’s a good thing for them. Derivatives, people have to hedge, so then the clearing and settlement, plus the data. So if you look at the data part which is just under half of the earnings, you get pretty steady Eddie, sticky recurring revenue. And for a business that is still selling at fairly attractive valuations for the longer-term growth, I mean these businesses can grow at almost lower double digits for a very long time, you know, for a fairly long time, and most of the earnings have free cashflow.

So you kind of get a play on volatility in interest rates, level of interest rates. Because higher rates means they get more margin, you know, they make more, earn more interest on the margin than they keep, you know, crude oil futures, commodity futures, stock exchange futures, individual stocks. So I think it actually captures the longer-term dynamism in from a capital allocation perspective any which way. So we quite find them attractive and there are quite a bit of operative leverage because 5% revenue growth could easily translate into lower double digit EPS growth.

PRESENTER: Well, that’s the positive story on it, but what could go wrong, what are the risks?

RAJIV JAIN: Yes as you’ve said there’s no business which doesn’t have negatives; in fact I feel the best businesses, businesses are the one which are maybe 60% positive and 40% negative. There are no business which is 90% positive. I think some of the key negatives are that if you look at disruption on the cash equity side, there’s fragmentation [unclear 0:06:53] which has reduced the value of some of the exchanges. Number two is that regulation has positively impacted them, but would that be a longer-term [unclear 0:07:06] or not. Number three would be the data side because they have, you know, they have quite a bit of pricing power. So there has been some backlash from their customers, i.e. some of the brokers, large brokers who have said well these guys are charging too much for the data. So there might be some regulatory risk coming from that.

PRESENTER: You also hold Bank Central Asia, which I think is Indonesia’s third largest bank, what’s the attraction?

RAJIV JAIN: So we quite like banks in some of the countries where they have penetration headroom; in other words, banking is still underpenetrated, enough folks don’t have bank accounts so there’s longer-term tailwind from that. Number two is we like banks which have very low cost of funding; in other words, when the current accounts, savings accounts are a significant portion of the deposit base, it’s actually very cheap money. So in bank as a commodity so low cost refunding means you can out-compete others. They are also very big on cash management. So it’s a family-owned bank which is very conservative in sort of they’re willing to lose market share if the pricing is not attractive. And in a growing market like Indonesia, they could continue to grow at sort of mid-teens for a long time, you’re not making call on credit recycle. In developed markets, if you look at it when you buy a bank, you almost are making call on credit cycle. I mean lending is not going to keep growing through the cycle as such. There’s lot less NPL issue, the profitability’s a lot higher, for example BCA, their return on assets is just about 3%, which is almost 3x if not higher of the best banks in Europe, so they’re a very profitable banks but secular tailwind.

PRESENTER: You mentioned it’s a family-run business, is there a danger that you’re a minority shareholder and an outsider?

RAJIV JAIN: Yes there’s no question about it. I think family ownership can be positive or negative; I think it cuts both ways. If you look at historical data, family-owned companies tend to do reasonably well as long as they have been good stewards of capital or there are no governance issues. So this company has had very good governance and I think the family ownership has been a positive because in a bank, as you know, it’s not difficult to kill a bank, because you buy definition leverage, and we saw that in 2008, 2009 and time and time again. So family ownership in this case has been a positive but you’re absolutely right it can be a massive negative if the governance is not as good.

PRESENTER: GQG was founded in 2016; you’ve run almost $27bn. How do you manage that growth and the money at the same time?

RAJIV JAIN: So first of all I was co-COO in my prior shop, I’m no longer co-COO. I enjoy running money so I want to focus on that so I’m a CIO. Tim, my colleague, he runs the whole company first of all. So I have less people reporting to me than I probably had before. But I think more importantly we take a lot of pride in the fact that we are probably one of the most client-aligned boutiques in the business. I have vast majority of my network, not liquid [unclear 0:10:04] just in the same products we offer our clients. As you know we don’t allow any personal trading. So we truly eat our cooking, and that means we’re very return focused. So we’ve already sort of said we’ll soft load some of the products because they feel, you know, we’re aware, we want to keep enough capacity to be remain nimble, not to grow for the sake of growth. And there are no outside [unclear 0:10:25] to really put pressure on, which as you know in this day and age, lot of large shops are forced to grow because either they’re listed or there’s pressure to grow. And they keep growing irrespective of size and they clearly focus a lot less on sort of creating [unclear 0:10:37], you know, value for clients. We truly – that’s all we do.

PRESENTER: You’re set up by fund managers. So how do you go about creating a separate risk framework that you have to respect and report to?

RAJIV JAIN: Yes no I think first of all we only focus on large cap, very large liquid names. So, we don’t have, you know, we don’t try to do some small cap, mid cap and so on and so forth. But I think your point is they’ll take in, what we try to do is there’s client-led restrictions, and we also have internal checks and balances. I mean we spend quite a bit of time on getting some of the best of the breed compliance, you know, or general counsel and the operation folks, I mean there are a lot of senior people in the team just to make sure the governance is truly best in class. So, and I think what we try to do is focus on very large liquid names, which reduces this [unclear 0:11:32] and so on and so forth. And clearly the guidelines have, and we can’t violate the guidelines which are set by clients and actually internally.

PRESENTER: In summary, what do you think the biggest risks and opportunities are in the markets right now?

RAJIV JAIN: I think clearly the escalation of a trade war is an issue. Brexit I feel is probably more kind of closer to resolution than not, but time will tell. But I think the real issue that interest rates are basically zero or negative. And I think the question is how much is inbuilt the leverage that we don’t appreciate, whether it’s [unclear 0:12:04] markets, and so on and so forth. So the banking systems look reasonably healthy. So I’m not concerned on the banking side. But are they from shadow banks, you know, how much is the shadow lending could be problematic in financial institutions, you know, the fixed income instruments. A lot of money has gone into fixed income, you know, funds. There’s in fact this year you’ve seen the most outflows in the equity side I think since 2008, so there’s a lot of pessimism. But on the fixed income side, despite the fact they’re not getting paid much, a lot of money has gone in. And low cost of money or cheap money typically leads to bad behaviour.

Nobody’s going to misbehave at double digit rates; people tend to misbehave when it’s free money. So I think free money is, I wouldn’t say it’s a bubble, but that’s the true concern people should have and the manifestation of that. So we feel that balance sheet quality is terribly important. Now in terms of where the positive opportunities set I feel is, like healthcare for example seems particularly attractive. The bunch of country, bunch of sort of larger healthcare names which have been penalised because of the political rhetoric in US, but business would not be that much impacted either way. So I think that’s an attractive area.

PRESENTER: Rajiv Jain, thank you.

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