Where top global fund is investing next after halving tech shares

Kyle Caldwell, our funds and investment education editor, puts the questions to Brian Kersmanc, manager of GQG Partners Global Equity fund.

Over the past couple of years, due to the dominance of a small number of technology companies, it's been a challenging period for funds to gain an edge over the global stock market.

However, this fund has delivered strong returns since it became available to UK investors nearly five years ago. Kyle finds out how the fund defines quality-growth investing, why it's been halving exposure to tech stocks, and where it's using the proceeds to invest next.

GQG Partners Global Equity fund is one of interactive investor’s Super 60 fund ideas.

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Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. I'm Kyle Caldwell, and today I have with me Brian Kersmanc fund manager of the GQG Partners Global Equity fund. Brian, thanks for coming in today.

Brian Kersmanc, manager of the GQG Partners Global Equity fund: Well, thank you very much for having me.

Kyle Caldwell: So, Brian, GQG stands for “Global Quality Growth”. Now in the past, the global fund has had exposure to certain sectors that neither fit the quality or growth descriptions. For example, in 2022 you had exposure to energy stocks. So, what does global quality growth mean to you?

Brian Kersmanc: As a firm, one of the things we kind of pride ourselves on is this sort of open-mindedness of where growth can come from and where quality can come from.

The example I always like to use, going back to the energy reference that you made, is that if I were to have asked a roomful of people two years ago whether Exxon Mobil Corp (NYSE:XOM), for example, is a high-quality company, maybe one person out of 30 would have raised their hand. I would have got a lot of pushback saying it's a high-capital intensity business. They're pulling a commodity out of the ground, same as anybody else's commodity subject to economic market cycles, so a low-quality business.

But if I were to wind the clock back 10 years ago, or 20 years ago, or 30 years ago, and I had asked a roomful of people again; is Exxon a high-quality business? 29 of 30 people would have put their hands in the air and said, absolutely, yes, a quality compounding business.

Even if oil prices fall, they have the midstream, the refining and the pipeline and distribution business, they're very strong as well. So, that offsets and allows for quality compounding and they're more than happy to own this and their blue-chip portfolio, their retirement savings, and this high-compounding type of portfolio.

So, our question is, and what we're always asking is, why was it considered high quality then? Why was it not considered as high quality over the last couple of years? And is there a case to be made for some of these energy companies for it to be a much higher-quality execution story, kind of go-forward basis, so that's really what we're trying to go for.

In terms of the growth aspect, we're just looking to grow capital over the course of time. So, we're not married to a specific style box of 'growth' or 'value' or anything like that.

As far as I'm concerned there's growth, there's value and then there's just great compounding businesses. So, if I can get growth through the earnings appreciation, maybe a little bit of the yield as well, in terms of the dividend coming off of that name, and I can get to a reasonable rate of return, that's great growth for me.

And then you kind of wrap it in with the quality definition that we talked about before. That's what we're looking for.

Kyle Caldwell: You focus on the fundamentals of a business, but you also take into account the wider macro backdrop. How does that macro fit in with how you invest?

Brian Kersmanc: We are fundamental bottom-up investors and anything that we invest in we take a five-year view [on] and we have a fundamental bottom-up approach in terms of getting to those names.

That said, we do also consider ourselves macro aware, and the way I like to describe it is that macro will never be a "switch on" for us, but it can be a "switch off". So, we'll never say, for example, that in India the macro situation looks fantastic.

We need to find a bunch of things that work well, that's not the way it typically works for us. We'll find things that are a fundamental bottom-up basis, and that'll organically grow into the allocations that you see. However, we do use macro as a risk-off sort of situation where we'll allow the macro to override the fundamental bottom-up thesis.

So if there's a risk, a geopolitical type of risk or something going on, even if the fundamental bottom-up story of that name is very strong, we'll say, from a macro perspective, from a risk-management perspective, let's remove that name and reduce that exposure in that sense in that way.

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Kyle Caldwell: So, let's move on to the portfolio. I can see in your top 10 holdings that your two biggest positions are to the two weight-loss drug winners Novo Nordisk A/S ADR (NYSE:NVO) and Eli Lilly and Co (NYSE:LLY). Is that a key theme at the moment for the fund?

Brian Kersmanc: Yes, so again it comes down to the fundamental bottom-up behaviour and risk/reward of these individual names.

We see these two companies as a duopoly within what's called the GLP-1 space. They have found a drug that really does a good job in terms of diabetes management, and things along those lines, much better than insulin did, much better than a lot of the other diabetes drugs that were out there.

They had recently found out as well, that it has a very incremental positive impact in that it also helps control weight and helps with weight loss as well.

I would say that the core of the thesis for us isn't necessarily even on the weight-loss side of things. That might even be a little bit overhyped in the near-term. Long term, it could be an absolutely massive market.

I think it's really interesting looking at just the diabetes population, it's simply a better mousetrap to address those issues.

It's very hard to manufacture. They are the duopoly in this space. It's very hard for other folks to come in and disrupt that.

I think the headroom for the diabetes space in particular is very hard to disrupt. And these guys will take the long term, sort of headroom in that space.

The weight-loss aspect is just a call option to the upside if they're able to really execute on that as well.

Kyle Caldwell: I can also see in the top 10 holdings, that you have some exposure to US technology companies. Is this a play on artificial intelligence (AI), or is there more to it than that?

Brian Kersmanc: What's interesting here, and one of the things to know about us as well, is that we will be very dynamic and we will move the portfolio based on the opportunity sets that we see or don't see.

Oftentimes, it's as much about what we don't own in a particular time and when we choose not to own something versus when we choose to.

In 2022, the same year that we had a decent amount of energy exposure, we had basically zero tech in the portfolios as well. In 2023, we had noticed that after a multi-year downcycle in tech, especially in the semiconductor side and semi-cap equipment, but also in other areas of tech, that things seem to be bottoming out.

We started seeing a lot of indications that there [were] these green shoots, and you start seeing some re-acceleration, valuations are also a lot more attractive at that point in time.

And note, nothing that I've set up until this point has anything to do with artificial intelligence. It's just the capital cycle, more reasonable valuations, green shoots, fundamentals getting better, reasonable price on top of that.

AI has almost been like the gasoline that's been thrown on the fire and accelerated this capital cycle that we're currently seeing right now, maybe even elongating the capital cycle that we've seen right now.

It is yet to be seen how far this proliferates. But we've seen, at least in certain spaces, that companies are getting a real return on AI. So, we are seeing that as a sort of interesting trend in terms of the companies we're seeing and we're consolidating around the names, that we think will ultimately benefit the most and be the epicentre of the economics of this AI investment, if you will.

Kyle Caldwell: Technology is a major theme in the portfolio, but you've been reducing exposure of late. Over the past couple of months, you've halved exposure to around 21% at the moment. Why have you been doing that, and how have you been doing that?

Brian Kersmanc: In terms of the reduction of the exposure, the way that I like to characterise it is if you think about driving down a road, we saw that the road was fairly clear. It's bright and sunny outside and we thought that the risk/reward opportunity was really interesting and that we could drive a little bit faster on the road conditions where we're pretty safe at that point in time.

I would say that within the last couple of months, there may have been a couple of clouds that have come on the horizon. Not to the extent that we're overly concerned, that we need to completely get out of the way of tech, but we should maybe throttle back a little bit. Maybe the road is going to be a little bit bumpier [for] a couple of kilometres or maybe there is going to be some inclement weather.

Let's just temper it back and neutralise the positioning, and then also consolidate around the things that we think are working a little bit better in the tech ecosystem.

So, up until this point, software has been a little bit disappointing, so the bigger software names are areas that we have sort of trimmed back and reduced exposure on because they participate in some of the AI hype and they did come off of a rebound of that bottoming action that I was talking about.

But it hasn't necessarily lived up to the potential and the growth that investors expected out of them versus you are seeing more of the consolidation of the returns happening in certain semiconductor and semiconductor-cap equipment in the tech space.

So, we have been consolidating around those types of plays, a little more so than some of those other areas. We've just rationalised that exposure down and balanced and neutralised our positioning within the portfolio.

Kyle Caldwell: And what's your current stance on NVIDIA Corp (NASDAQ:NVDA)? I know it's in the top 10. Are you running your winner, or have you been taking some profits along the way?

Brian Kersmanc: Nvidia is an interesting one because Nvidia is again at the epicentre of what's going on from an AI standpoint and from an investment standpoint.

We do think that it is still fairly attractively priced for the type of outlook you have, but it's not without risk either. There is always the risk that if there is some sort of pull forward in demand, if that AI promise doesn't filter out into other areas, there's always that risk there.

It is a very large company, there's a very large revenue base that they have to continue to grow, and you just do the simple math. Whether they continue to grow at 30% year over year, they're going to be the size of an EU country or the UK in terms of GDP if you extrapolate that out long enough.

So, that'll inherently limit some of the headroom on it, but we're still quite positive on the name overall.

I think there are other names that have gotten a little bit more wrapped up in the hype around AI, but Nvidia, quite frankly, keeps delivering, and the earnings continue to come through and support the price action. So, we're still very constructive on that.

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We may have throttled back a little bit versus the very aggressive positioning that we had previously, but we're still excited about the prospect of what's to come.

I think the other benefit of holding a name like Nvidia is that it trades somewhere in the neighbourhood of $30 billion a day in terms of its liquidity and the volume that they put through.

So, even that size for us, and the size and scale that we operate (gives the flexibility), if we need to reduce sizing and have a slightly smaller call [in Nvidia],  or if we want to ramp back up, let's say the data continues to push in the right direction and we're a little bit too nervous about our position and we want to go back aggressively the way we were before, trading of those volumes is very easy for us to size up and down a position without having any impact on the market in terms of the price action or anything like that.

So, we believe that that's a strategic advantage that we have versus a lot of other managers [who] might shy away from turnover, might shy away from changing their sizing on names, [while] we stuck to a certain five-year call. We'll be very nimble and adaptive and use that to our almost advantage, if you will.

Kyle Caldwell: And where have you been reinvesting the cash from reducing that technology weighting?

Brian Kersmanc: As I mentioned before, we're neutralising the call a little bit on tech. It isn't mandating that we're heavily weighted within some of these names in the tech space. We've rationalised things down.

Some of the areas that we found interesting are kind of the older, more boring areas of the market, consumer staples, utilities. We think there's some level of excitement. Maybe that's just because I'm a stock picker and I get excited about these kind of things, but utilities in particular.

This is an interesting one [as] we have the same analysts looking at both the emerging market space and the developed market space, and everywhere in between.

I run portfolios along with Rajiv Jain [chair and CIO of GQG Partners] and Sudarshan Murthy[co-fund manager]. All three of us run all the portfolios concurrently.

This is a trend that came a little bit more from the emerging market side that alerted us to what's going on in the developed market side. In emerging markets, we noted that baseload electricity supply was not enough to fulfil the demand that was coming [through], and that was happening in some of the higher-growth countries, but even other areas where they've pushed renewable power a little bit further, there wasn't enough stable, reliable baseload power.

You translate that over to the US and you're starting to see the same type of thing happen, data centre or no data centre, and especially in the states that have larger population growth or more electrification that's happening overall. You're seeing that there hasn't been enough baseload investment in terms of core baseload electricity production to fulfil the demand that's out there.

So, that's an interesting area that we're seeing the multiples on, a lot of those utility names had come off, and are trading at much more reasonable values. We believe that there is growth in the utilities as boring as they are. Time is ticking and you've seen some some pretty interesting results there.

Consumer staples is another area that a lot of folks bought into last year. They pushed the multiples pretty high, mid-20s for some of these staples companies, high-quality businesses that hadn't necessarily changed. But they were bidding them up because they're looking for safety.

We were expecting that a recession was going to come because the central banks around the world had raised interest rates. The recession didn't necessarily materialise. Things might have slowed a little bit, but you didn't need that safety as much.

A lot of their growth was also being driven by pricing. They're pushing pricing through really aggressively as inflation was a little bit higher, or volumes slowed down, and a lot of those names and the pricing has slowed down, so the top line slowed and the multiples have come down to the point where a lot are trading at mid-teen multiples at this point in time.

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Now some of those volumes have stabilised, and maybe even the pricing has stabilised as well and become much more interesting.

So again, although it's not quite as exciting as the super-fast growth you get out of the technology space, you're getting really good double-digit compounding out of these businesses.

They will protect a little bit better to the downside, hopefully. They typically do, and we think that they're a good sort of ballast and compounder in the portfolio overall.

Kyle Caldwell:  What other trends or sectors are you favouring at the moment that you have a lot of conviction in?

Brian Kersmanc: What excites us the most is the earnings trajectory. So, you get the earnings correct and then you see is it worth paying the multiple that you're paying for that. I think what's exciting about a lot of the staples' names is yes, they have come back in, but you can get that visibility of that earnings duration on a longer-term basis.

And you can see that if you're a Nestle SA (SIX:NESN), for example, and you're selling coffee, there's good organic growth in that category, and sort of the pet food category.

You're also seeing that they're trimming the portfolio of these other ancillary products that haven't been as good growth. So, that 80/20 rule, if you will, [where] 80% of the profits are being made by 20% of the portfolio, they're focusing on that smaller part of the portfolio. That's really driving a lot of the growth in the valley and that could create a higher-quality investment with good visibility on a longer-term basis.

Kyle Caldwell: Brian, thanks for coming in today.

Brian Kersmanc: Thanks for having me. Appreciate the discussion.

Kyle Caldwell: That's it for our latest Insider Interview. Hope you've enjoyed it. Let us know what you think you can comment, like, and do hit that subscribe button and hopefully I'll see you again next time.