GQG Partners Initiation: Strong Momentum And Upside Not Priced In

Business Strategy & Outlook

GQG is a boutique manager of listed equities. As of April 2022, GQG manages USD 90 billion for institutional, wholesale and sub advised clients. GQG manages global, U.S., ex-U.S., and emerging market equities. The firm has a blended investment style: It is willing to pay up for quality growth companies, but also holds stocks trading at lower valuation multiples. GQG’s portfolios are concentrated and don’t resemble their benchmarks. Its strategies tend to outperform more during downturns than in bull markets. The firm is in the early innings of expanding out of its core U.S. market. GQG is growing its distribution in Australia, Canada, and the Middle East. It is particularly focused on exploiting the growth of Australia’s superannuation system. It also intends to grow its number of wholesale and subadvised mandates. More than 75% of FUM is U.S.-centred, and less-sticky institutional and subadvised money.

Management prioritises organic growth over acquisitions. Rather than proliferating its offerings, GQG would sell new products only when its research efforts can be leveraged, with minimal incremental investment. For example, its concentrated global strategy is a subset of its global equity offering. The firm deliberately undercuts competitors on pricing and boasts below-average fees. Ongoing inflows and compounding of FUM is expected to drive earnings growth. A strong track record, expanding distribution and growing publicity beyond the U.S. are likely to support new business wins. There is ample capacity for the firm to onboard more clients as it mainly invests in large caps. Having bottom-quartile fees means GQG is well-positioned to withstand industry wide fee compression relative to other active managers. Moreover, there is still room for operating margins to expand as GQG’s expense needs—including remuneration—are not tied to revenue. However, investors should brace for periods of uneven performance given GQG’s portfolio and product concentration. The lack of product variety means GQG has limited levers to stem net outflows. GQG remains highly reliant on co-founder Rajiv Jain, so the group has much to lose if it cannot retain his services.

Financial Strengths

GQG’s strong financial health is underpinned by its conservative balance sheet with no debt and a healthy cash balance. Operations are funded by operating cash flows. Its 2021 initial public offering was a sell-down, with the proceeds raised mainly used to pay Rajiv Jain, Tim Carver, Pacific Current Group and internal employees. The firm has no intention (nor a need) to drawdown debt to fund its operating activities. Consistent earnings, strong cash flow conversion, and a strong balance sheet support GQG’s high dividend payout ratio target of between 85%-95% of distributable earnings (net income after tax plus tax benefit resulting from amortisation of the deferred tax asset). High dividend payouts are a key feature of the capital-light asset-management sector, delivering attractive shareholder returns while maintaining comfortable balance sheet settings. Notwithstanding the high payout ratio, GQG’s cash on balance sheet is projected to grow, enabling attractive dividends despite possible earnings volatility.

Bulls Say

GQG’s enviable performance track record is supportive of further mandate wins.
The firm is better placed than most active managers to withstand fee compression thanks to its highly competitive fee structure.
There is further room for GQG to grow earnings. Penetration in certain strategy categories remain low, and it’s in the early innings of distributing outside the U.S. Its sheer scale of FUM means that earnings can grow from just compounding market returns.

Company Description

Established in 2016, GQG Partners Inc. is a global boutique asset management firm focused on active equity portfolios. The company offers investment advisory and portfolio management services. GQG Partners manages money for investors around the world. They include pension funds, sovereign funds, wealth management firms, and other financial institutions. Headquartered in Fort Lauderdale, Florida, GQG also has operations in New York, Seattle, London, Sydney, and other locations.

(Source: Morningstar)

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