GQG Global Quality Dividend (GQFPX / GQFIX)

Objective and strategy

The strategy is to assemble a portfolio of 35-70 stocks. The target universe is high-quality, dividend-paying securities of U.S. and non-U.S. companies, including those in emerging market countries. GQG Partners primarily relies on fundamental, rather than quantitative, research to evaluate each business based on financial strength, sustainability of earnings growth, and quality of management. The investment strategy is quality first; from the pool of firms that meet its quality standards, it goes looking for undervalued companies with substantial dividends. GQG is more typically a value than a growth investor.

As of May 2024, the fund owns 45 stocks with an average market cap of $150 billion. About 30% of the portfolio are US companies, 5% resides in cash and the remainder in international stocks. Its direct US exposure is about 60% of its peers and its emerging markets exposure (about 25%) is about ten times its peer average.

Adviser

GQG Partners. GQG stands for Global Quality Growth, which represents a sort of touchstone for founder Rajiv Jain. Mr. Jain managed 15 funds with $50 billion in assets for the 100-year-old Swiss firm Vontobel before leaving to start his own firm in 2016. Headquartered in Ft. Lauderdale, Florida, but listed on the Australian Stock Exchange, GQG has seen meteoric growth driven both by faith in Mr. Jain’s abilities and by consistently top-tier performance by every one of the firm’s strategies. The firm now has 195 associates and manages $143 billion in assets. They advise six US funds and sub-advise two others, while also providing separately managed accounts and collective investment trusts for European and other investors. As of May 1, 2024, every fund, either for US or European investors, that is eligible for a Morningstar rating, has earned five stars.

Managers

Rajiv Jain, Brian Kersmanc, Sudarshan Murthy and Siddharth Jain. Rajiv Jain is the firm’s founder, CIO, and lead portfolio manager. Mr. Kersmanc joined GQG in 2016 as a senior investment analyst. Prior to that, he had six years at Jennison Associates. Mr. Murthy also joined GQG as an analyst in 2016 after spending five years at Matthews International Capital. Siddharth Jain joined the firm in 2021 after spending a year at Warburg Pincus. He is a graduate of the University of Chicago.

Strategy capacity and closure

By Mr. Jain’s calculation, there are no practical capacity constraints as the strategy tends to hold highly liquid mega-cap names such as AstraZeneca, Philip Morris, and Coca-Cola.

Management’s stake in the fund

Mr. Jain has invested over $1 million in this fund and, indeed, in each of GQG’s funds. His comanagers have no recorded stake in this fund, though they have invested in their firm’s flagship Emerging Markets fund.

Opening date

June 30, 2021

Minimum investment

$2500 for Investor shares, $500,000 for Institutional shares

Expense ratio

0.79% for Investor shares and 0.68% for Institutional shares on assets of $115 million (as of April 2024)

Comments

GQG Quality Dividend Income is designed as a core holding driven by three distinctive concerns: quality first, buying at a fair price, and finding sustainable dividend income. While the fund is young, the strategy is long-tested, and it has performed well in the not-quite-three years of its existence. Since Quality Dividend represents the income-rich end of Quality Equity’s investing universe, we’ve included both that fund and Quality Dividend’s peer group for comparison.

Performance, October 2021 – March 2024

How do you read that table?

APR / annual percentage return means total raw returns. Quality Dividend more than doubles its peer group average, though investing in more established companies meant that it trailed its five-star sibling by a bit.

Sharpe ratio and Ulcer index are measures of risk-adjusted returns. The Ulcer Index incorporates the depth and duration of a fund’s maximum drawdown in its calculation. A higher Sharpe ratio signals higher risk-adjusted returns while a lower Ulcer index signals … well, smaller ulcers. Quality Dividend leads both its sibling and its peer group here, as it does in every subsequent measure of volatility.

Maximum drawdown, standard deviation, and downside (or “bad”) deviation measure a fund’s volatility. In each case, smaller is better.

Batting average represents the percentage of months in which a fund leads its peer group. Quality Dividend beat its peers 67% of the time while Quality Equity built a strong record against a different peer group, winning in 60% of months.

The short-term record is great but the question is, are there reasons for long-term investors to find the fund appealing? There are three arguments for considering GQG Quality Dividend Income Fund as a core holding, most especially for folks interested in income and stability as much as total return.

One, investing in quality stocks purchased at reasonable prices is a good idea. “Quality” tries to capture the notion that a firm’s earnings are not a flash-in-the-pan phenomenon where some happy combination of circumstances led to a windfall. Quality stocks are those that compound wealth steadily, consistently, and predictably over long periods. The GQG Partners argue that assessments of quality must be forward-looking (what will a firm do over the next five years?) rather than the backward-looking (what did the firm do over the past five years?) strategy embedded in many passive or smart beta funds.

One key element of a forward-looking assessment is stronger free cash flow margins (the percentage of total corporate revenue that’s free cash flow) than their peers “demonstrating some type of competitive moat around their businesses, which helps us gain conviction in their ability to sustain their dividends.” Other measures are consistent earnings growth, stable margins, little or no debt, and lots of dry powder.

The research is painfully clear: across different industries, time periods, and countries, high-quality stocks achieve the impossible: they produce both higher total returns and lower volatility than the market as a whole. Their advantage is particularly dramatic in falling markets, a phenomenon we examined in greater depth in “The Quality Anomaly,” May 2024.

Two, investing in dividend-paying stocks is a good idea. In ebullient, rising markets, investors tend to bid up the price of sketchy stocks in the ill-founded belief that they’ve found The Next Big Thing and are going to ride it to the moon. In less hospitable markets, however, dividend-paying stocks can provide crucial advantages for investors. Our current reality is dominated by abnormally high and “sticky” rates of inflation. In response, the Federal Reserve has reiterated a ”higher for longer” mantra; instead of the six to seven interest rate cuts that investors anticipated at the beginning of 2024, we may see no cuts at all. Optimists now hope for two small reductions. That’s a problem for leveraged companies that have experienced negative cash flows and are living on their lines of credit. That credit has become dramatically more expensive and less available. At the same time, high interest rates make Treasury bonds an attractive alternative to stocks.

GQG argues that these companies, which it designates “long duration stocks,” act just like long duration bonds in a high inflation, high-interest rate environment: they fall.

In contrast, quality firms with sustainable dividends offer several real advantages. First, dividends can add up to real money. Over the past 120 years, dividends have accounted for fully half of the market’s total gains. Currently, Global Quality Dividend Income’s portfolio generates a 3.38% yield. Dividends have fallen out of favor primarily because a “lower for longer” interest rate regime, which MFO terms “The Great Distortion,” rewarded stupid risk-taking and financial games. Dividend-paying companies tended to be less given to such games.

Three, trusting in Rajiv Jain and his team is a particularly good idea. It’s hard to overstate the strength of the case for Mr. Jain and his discipline. He initiated the Quality Growth strategy while working at Vontobel from 1994-2016. In writing about the launch of the Global Quality Dividend Income Fund three years ago, we noted:

It is fair to describe his career to date as “spectacularly successful.” Over a ten-year period, Mr. Jain’s Vontobel fund posted the highest returns among diversified E.M. equity funds, suffered the smallest maximum drawdown, had the second-lowest volatility, and tied for the lowest downside volatility (a variation of standard deviation focusing on “bad” volatility) which led to the group’s second-highest Sharpe ratio (the industry’s most widely-used measure of risk-adjusted returns).

Currently, all three of the firm’s older funds have five-star ratings as does every eligible European product. Every GQG fund has outperformed its peers, by an average of 400 bps, since inception, and has done some with lower volatility. In all likelihood, the three dividend income funds will receive the same recognition from Morningstar this summer.

If you believe that we’re suddenly going to wake up to discover that the happy days of zero inflation, zero interest rates, and a Fed promise never to let the markets fall have returned, you should probably go speculate on low-quality, high-volatility sexy stocks. If you believe that you need to invest against the prospect that markets are going to be marked by persistent if not crippling inflation, significant interest rates, and inconsistent growth, you should probably invest in high-quality stocks with sustainably high dividend income. You’ll earn higher total returns over time, suffer less volatility, and enjoy an actual cash stream from your portfolio.

If that prospect intrigues you, no one has done it better for longer than GQG. They warrant your attention.

GQG Partners Global Quality Income Fund