Global and Manager Diversification
GuideStone International Equity Fund
Author: Ticker Magazine
Last Update: Dec 01, 11:18 AM EST
|When investors think of multi-manager strategies, they tend to associate them with a selection of well-performing asset managers, ignoring their strategic diversification advantage. Jay Edmondson, Senior Manager of Investment Research of the GuideStone International Equity Fund, discusses how diversified exposure benefits the strategy in the long term. Building the right mix is the primary expertise of the firm, which aims at consistent performance with lower or similar risk levels than those of the benchmark.
“The multi-manager approach is probably what most strongly differentiates us from our peers. That approach gives investors access to industry-recognized institutional money management firms.”
Q: How has the fund evolved since its inception?
GuideStone Capital Management serves as the investment advisor to the GuideStone funds and in total we manage approximately $11.5 billion in assets across 25 investment funds, including the International Equity Fund.
The fund was launched in August 2001 and was benchmarked to the MSCI ACWI Ex US index from 2001 to November 2013, when we transitioned to the MSCI EAFE benchmark.
At the time we also decided to remove the emerging markets managers from the fund and to form a dedicated emerging market equities' fund. Prior to November 2013, our International Equity fund had an allocation of about 25% to emerging markets. After the change, that exposure fell to about 8% to 10% and we benchmarked the fund to the EAFE.
Under our current structure, we have about $1.5 billion in the fund. It is a multi-managed fund with five managers - one core manager, two value-oriented managers, and two growth managers.
Q: What is the core mission of the fund?
The foundation of our investment philosophy is our belief that superior risk-adjusted returns can be achieved through a long-term fundamental investing approach that seeks to identify best-in-class managers and to optimally allocates capital among them, while remaining committed to Christian values. In addition, we believe in active management and in the multi-manager approach in constructing our funds.
Q: What distinguishes the fund from its peers?
The multi-manager approach is probably what most strongly differentiates us from our peers. That approach gives investors access to industry-recognized institutional money management firms that most individual investors don’t have access to. Another differentiator is that we are a Christian values based and socially responsible fund.
Q: How is this multi-manager fund structured currently?
The size of the fund is about $1.5 billion and there are five managers within the fund. Our core manager is AQR Capital Management, a quantitative manager, whose strategy is based on value and momentum. AQR based in Greenwich, Connecticut is responsible for about 20% of the fund.
We have two value-oriented managers. One of them is Barrow, Hanley, Mewhinney & Strauss based in Dallas, Texas which provides core value exposure. The other value manager is Mondrian Investment Partners based in London, U.K., which focuses on fundamentals and utilizes a dividend-discount model. It provides diversified, deep value exposure.
On the growth side of the fund, we have two managers as well. Baillie Gifford based in Edinburgh, U.K. provides core growth exposure, while MFS Institutional Advisors based in Boston, Massachusetts, focuses on sustainable earnings growth.
Again, the fund is benchmarked to the MSCI EAFE Index – Europe, Australasia and Far East. While some of the managers tactically allocate to emerging markets, our exposure to that segment is approximately 8% to 10% of the overall fund.
Q: How does the multi-manager approach translate into an investment strategy?
When we combine the managers together, we aim at exposures that are similar to the MSCI EAFE benchmark, but at the same time we strive for low tracking error. Our goal is to get the highest returns with the lowest amount of tracking error at the Fund level.
Q: How do you apply your manager selection?
When we construct the fund, we take into account both qualitative and quantitative considerations. From a qualitative perspective, we analyze the firm's investment team, its infrastructure, and its business. We identify and evaluate components of the firm's investment process to determine its consistency and repeatability.
Each manager goes through a multi-step process, which overweighs qualitative factors, but we consider quantitative factors as well. Our goal is to validate the process of each sub-advisor through portfolio analysis, performance analysis, and risk management analysis.
Hopefully, when we get to the fund's construction process, we have selected the best managers in their class. These managers should also have low correlations with each other and, when combined, should create a fund that is competitive within the EAFE space.
Q: What is your research process?
We employ both qualitative and quantitative screens, but the qualitative factors account for about 80% of the sub-advisor decision-making process. The qualitative factors we analyze include the investment team, the experience of the portfolio managers and the analysts.
We explore their process and philosophy, as well as the clarity of the investment style. We want to see the competitive advantage of the managers in their particular space. We examine their decision-making process and style for consistency.
On the quantitative side, we use several analytical tools. We utilize FactSet, which is a holdings-based analytical tool. On the returns side, we use eVestment and Zephyr StyleADVISOR to analyze different return streams and optimizations. These are primary quantitative tools that we use for putting the managers and funds together.
Q: How do you decide how much capital to allocate to each of the managers?
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