In a funds under management (FUM) update for July, GQG Partners reported $1.4 billion in net outflows in July with FUM falling from US$172.4 billion to US$166.6 billion.
The US$6 billion decline in funds under management was partly driven by the loss of over $1 billion from an institutional client.
The firm told InvestorDaily that despite the recent decline in FUM, GQG Partners continues to see strong interest in its funds, noting that net flows year to date remained positive at US$6.7 billion.
“We feel extremely compelled by our current positioning, given what we perceive as extreme valuations and forward earnings expectations,” the firm said.
GQG Partners said throughout its history, the firm has seen periods of outflows as clients adjust their investment, risk or capital allocation decisions, or as their performance waxes and wanes.
“As a concentrated, benchmark-agnostic, active manager, we expect to have periods of outperformance mixed with periods of underperformance,” it said.
In its ASX update, GQG Partners said it was currently defensively positioned in its strategies which had resulted in underperformance relative to respective benchmarks.
The firm said the defensive positioning was implemented in order to reduce risk within client portfolios.
“Sticking to our discipline, we are avoiding areas where we see extreme valuation and frothiness – in our view not dissimilar to the extremes of the dotcom era,” the update stated.
“As a result of this positioning, we continued to experience underperformance across all strategies as compared to their respective benchmarks year to date.”
Downside risks for FUM remain
The firm acknowledged that the relative underperformance of its strategies could be a headwind for future net flows.
“The negative net flows experienced in July could persist,” it said.
The firm said it continually re-underwrites its portfolio positions and reaffirms its positioning with the goal of compounding capital over the long term.
“We accept higher benchmark-relative volatility in the short term as we believe this positioning will help us achieve better absolute and risk-adjusted returns for clients over the long run,” it said.
Morningstar equity analyst Shaun Ler agreed that negative net flows were likely to continue given the recent performance of the firm’s strategies.
“I suspect the redemptions will persist given the challenged relative performance track record, alongside GQG’s July release which alluded to the possibility of future net flows facing headwinds,” Ler said.
In a recent analyst note, Ler said the recent decline in FUM for July aligned with Morningstar’s thesis that outperformance is challenging for managers like GQG and that redemption risks remain elevated given passive competition.
Ler noted that redemptions had occurred sooner than expected, with Morningstar originally predicting they would happen in the medium-term.
Morningstar said that near-term relative performance to benchmarks and peers across equity strategies have been challenging for GQG as the firm was caught off guard by the recent market rally.
Ler said while net outflows were small for July and mostly due to an institutional redemption, it raises the risk of other investors following suit.
“More than 70 per cent of FUM comprises institutional or sub-advised funds, which are less sticky than retail money,” he said.
Morningstar said that GQG still enjoys support from gatekeepers like research houses and asset consultants, many of whom assign favourable fund ratings and include GQG in model portfolios.
“While these don’t guarantee flows, they illustrate conviction in the firm’s ability to outperform over market cycles,” he said.
It also noted that GQG is known to periodically underperform given its dynamic approach and benchmark-agnostic portfolio.
“Prior extended periods of underperformance from September 2020 to September 2021 and from September 2022 to June 2023 were followed by stellar outperformance and net inflows remained throughout these periods,” it said.
However, it warned that downside risks for net outflows remain over the longer term.
“The primary risk is that sentiment among gatekeepers can shift and is not consistently positive,” it said.
“Ratings downgrades typically follow extended periods of relative underperformance. This means research houses and asset consultants could downgrade GQG’s funds if they underperform for an extended period,” it stated.
