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Global and Manager Diversification
GuideStone International Equity Fund
Interview with: Jay Edmondson

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.”
A: It is a strategic decision. If we add a new manager or terminate one, we would look at the weightings in a strategic way. We may occasionally increase or decrease the allocation to a manager to decrease the risk in the fund, but again, it is strategic.

For example, in the International Equity fund, the core space is managed by AQR and represents about 20% of the fund. The two value managers right now are responsible for 43% of the fund, while the two growth managers are in charge of 37% of the fund. So, currently, the fund has a slight value bias.

We choose managers that best complement our existing lineup. We evaluate the best managers within the growth, value and core spaces within the MSCI EAFE universe.

Q: How did the current growth and core managers stand out in your research process?

A: AQR is the core manager within the fund, which utilizes a quantitative strategy with three separate models - industry, country, and currency. That process involves taking simultaneous long and short positions in many securities across several markets. Their strategy is a quantitative strategy in which we have high confidence. In addition, we have known the firm for a long time.

Baillie Gifford works on the growth side of the fund. This is a strategy with higher tracking error and may invest up to 30% in emerging market companies. The manager has a long-term, bottom-up, growth style. Their objective is to select high-quality companies that can sustain an above-average growth rate and trade at reasonable valuations.

The other growth manager, MFS, operates on the core belief that earnings growth drives share price performance over the long term. The manager identifies companies with higher sustainable earnings growth rates, improving fundamentals, and stocks that are underpriced relative to their long-term growth prospects. They tactically invest in emerging market companies as well.

Barrow Hanley is a traditional value manager, which utilizes bottom-up stock selection and uses quantitative screens and in-depth fundamental analysis. The manager focuses on stocks in the cheapest segment of the market that exhibit improving operating fundamentals.

Also on the value side, Mondrian Investment Partners has a more defensive orientation. Through bottom-up stock selection, they seek companies that are undervalued based on fundamental analysis. They invest in emerging markets as well, although that exposure is limited to about 5% of their portfolio.

Q: How does the combination of people, performance, and process factor in selecting fund managers?

A: We believe AQR is one of the best quantitative strategies in the international space. We are attracted to their quantitative model and we use them not only in the International Equity Fund, but in several other funds as well. We utilize them as the core player within that fund.

Barrow Hanley is more bottom-up-oriented and provides true core value exposure. They have been in our fund since 2012. The other value manager, Mondrian has been a long-term partner for us; that strategy has been in the fund since its inception in 2001. While Barrow Hanley represents the traditional value style, Mondrian is the deep-value defensive player.

Baillie Gifford contributes exposure to higher growth. It focuses on higher quality companies with above-average growth rates. Finally, MFS provides a very concentrated growth strategy that focuses on sustainable earnings growth. They also conduct quantitative screens and in-depth fundamental research. Both of the growth managers have been in the fund since 2011.

When going through the manager selection process, we felt that these managers were the best in their class and also complemented each other. All of them have low correlations to each other. In the selection process, we make sure that each manager fits our existing lineup.

Q: When do you decide to change allocation or replace managers?

A: We constantly monitor the fund and the underlying managers. The last time we replaced a manager in the international equity fund was three or four years ago. Overall, the manager turnover for our fund complex is probably about 15 percent.

We did recently replace a manager for performance reasons and style drift in another Fund. It is not just based on performance. We look at everything, including qualitative and quantitative factors, when considering replacing or adding managers to the fund.

Q: How do Christian values affect your investment universe?

A: We do not invest in any company that is publicly recognized for doing business in alcohol, tobacco, gambling, pornography, and abortion. We screen for such issues and our team includes an investment analyst, who constantly monitors all of our existing holdings or any security that might potentially violate these publicly recognized industries.

Q: How do you approach risk management at the fund level?

A: We believe in active management. That means that we need to take active risks to outperform the benchmark. Typically, we define risk as relative, so we use tracking error as a measure of active risk.

There are several components of tracking error that we analyze. One of them is the stock-specific risk, which represents the risk a manager takes from actively weighting securities. Ideally, the majority of our tracking error would come from stock-specific risks.

The other component of tracking error that we follow is factor risk, and we aim to minimize it. The goal of our analysis is to determine the intrinsic risks the funds can emphasize over the long term to provide investors with higher probability and above-average returns for less or similar risks than the benchmark.

We manage risks both at the fund level and the manager level. The goal is to reduce the risks for which investors are not rewarded on a consistent basis, while emphasizing risks (i.e. intentional risks) that do provide an appropriate reward for the investor.

That approach allows the fund to use multiple concentrated and often higher-return strategies in a way that diversifies the total risk level of the fund. Even when the underlying managers have higher tracking error, through our analysis and the combination of managers we create, the overall tracking error at the fund level remains desirable. We monitor the risk to make sure the exposure to factor risks remains low and overall tracking level is within our range.

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