How long can GQG Partners’ success continue?

Stronger fund flows and a shift to higher-margin funds has benefitted GQG Partners lately but investors are underestimating the risk of performance mean reversion, according to Morningstar.

In its first-half results in August, the US firm said net revenue increased 53.1 per cent, from US$237.1 million to US$363.1 million. This was helped by an increase in management fees due to a shift in asset mix and performance fee agreements with 22 clients.

Revenue from these performance fees totalled US$19.4 million, which was an increase of US$12.4 million versus the prior year due to strong relative investment returns. 

Morningstar said: “While near-term flow momentum is strong due to recent outperformance, we believe the market may be underestimating the risk of performance mean reversion. We expect net flows to taper from current highs over time, and given GQG’s high operating leverage, earnings growth in the long term will likely slow.”

Funds under management (FUM) at the firm was US$155.6 billion as of 30 June, fuelled by net inflows during the six-month period of US$11.1 billion and gains in global equity markets. This compared to net flows of US$6.2 billion in the first half of 2023.

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But Morningstar flagged a large proportion of these – US$10.5 billion – came from the US market where active funds are facing pressure from passive ones.

“We expect GQG’s burgeoning funds under management to weigh on long-term performance. A  growing portion of its FUM now comes from the Americas, reaching 82 per cent, up from 80 per cent in June 2023, and 77 per cent in June 2022. 

“This region faces strong competition from passive investments, while capacity constraints for its strategies are also a medium-term risk – both likely to inhibit new flows. Year-to-date (to July 2024) net flows of US$14 billion already exceed the about US$10 billion recorded for 2023, but part of this could be due to pent-up demand – following depressed markets in 2022-2023 – that may not recur.”

Regarding the firm’s acquisition of minority stakes in three asset managers to form a private capital division which was announced earlier this year, Morningstar said it is a “positive development” for diversification as these asset classes are less affected by the threat of passive funds.

It was announced in March that the firm would be acquiring minority interests in Avante Capital Partners, Proterra Investment Partners, and Cordillera Investment Partners for an aggregate cash consideration of US$71.2 million from Pacific Current Group.

Chief executive Tim Carver has stated it views private markets as a “sunrise” part of the asset management world that is seeing growth and talent movement. 

Morningstar said: “We see GQG’s recent acquisition of minority interests in three private markets boutiques from Pacific Current Group, and subsequent establishment of its own private capital business, as a positive development. This move diversifies GQG’s earnings beyond public equities – an asset class prone to fee pressure and competition from passive investments – into private market assets, which are less replicable by passive strategies.

“However, we have not factored in any upside in our current projections. Management has not provided details on key earnings drivers for its private market investments, such as flows, fees, and margins. Also, management does not expect the private capital business to contribute meaningfully to earnings in the near term.”