Q: What is history of the fund and how has it evolved since its inception?
GuideStone’s Christian values date all the way back to 1918, when its parent organization was created to serve the retirement plans of Southern Baptist pastors and their widows.
In 1971 we started a “manager of managers” process, and we have had the same philosophy for more than 40 years. We entered the mutual fund space in 2001, when we created the GuideStone Value Equity Fund. In 2004 we started expanding our mutual fund family up to the present 32 funds.
Q: What are your current assets?
Assets under management of the GuideStone Value Equity Fund are over $1.3 billion, totaling approximately $10.5 billion across the mutual fund family. Of our 32 funds, 18 are strategies such as value equity, and the other 14 are a combination of asset allocation and target-date funds. The Value Equity Fund is one of our larger funds.
Q: How does your management of this fund make it different?
We employ a “manager of managers” approach with the Value Equity Fund and carry out our investment objectives by overseeing complementary subadvisors, each with unique investing strategies and strengths. We have chosen subadvisors with robust investment strategies, and selected them to minimize overlap but maximize the return through factors such as active share.
Additionally, there are four key investment pillars that guide our management of the Value Equity Fund.
The first pillar is we believe capital markets reward long-term investors. We align our approach with what we think investors are looking for in investment objectives, considering time horizons, risk tolerance and patience.
The second pillar is we want full access to global markets, so we take advantage of investment opportunities and provide proper diversification—with an eye toward prudent risk-taking.
The third pillar is we emphasize strategic rather than tactical investing. This helps us minimize emotional behavior and maintain long-term objectivity with a focus on intrinsic value.
The fourth and final pillar is our belief that active management can add value over the long term. Especially in the value space, there are companies you want to avoid because they are at the bottom, or are headed there. In those cases, it doesn’t make sense to hold the index and ride those falling securities all the way to the bottom. Active management provides an opportunity to sidestep those particular securities.
Q: What goes into the manager selection process?
We have a deep and experienced investment team here at GuideStone. With that, we utilize our knowledge of the value manager universe to identify best-in-class managers. In essence, it’s like putting together an all-star team of athletes; each athlete has a particular role on the team, and we set their respective assignment.
These subadvisors each manage a portfolio exclusively for us, based upon our criteria and guidelines. We call this their mandate.
For example, AJO LP, a subadvisor based in Philadelphia, Pennsylvania, has been managing money for us since the inception of the fund. AJO is in our lineup because of their quantitative expertise in managing value strategies that may not be in the typical investor’s portfolio. They try to find securities trading at a deep discount relative to their intrinsic value, based on their determination of the value of each company.
Q: What are some other subadvisors that you have?
Another of our subadvisors is Barrow, Hanley, Mewhinney & Strauss, LLC (OM Asset Management PLC). We consider them a core value manager, emphasizing the typical value characteristics of low price-earnings ratio, low price-book ratio, and low price to sales ratio.
They try to identify a concentrated number of stocks in their portfolio that are trading at a discount relative to their peer group or to the market. In this particular portfolio, the dividend yield is usually at or above the market level, providing more income through stock dividends.
These types of investments are meant to be in the three- to five-year horizon or longer, and their profile strategy typically has a lower turnover.
Our third subadvisor is TCW Investment Management Company in New York. Their strategy focuses on relative value as a sub-style.
To define that, they look at companies, some of which are accustomed to being growth companies, but for whatever reason, have fallen out of favor or unable to maintain earnings at a pace that satisfies growth managers.
TCW targets these stocks trading below the market valuation relative to their peer group, at what may be a short-term impaired pricing. The stocks also have some sort of catalyst going forward that will enhance company value and potential earnings growth.
These are not deep value stocks or high-growth stocks, but ones that pass between value and growth styles. AJO and Barrow Hanley may own cheaper stocks than TCW, but we still wanted something complementary in the Value Fund—and its strategy fits well with those of the other two subadvisors.
Q: What is your key to keeping your funds balanced?
We emphasize security selection first and foremost with this fund, and not so much factor biases like dividend yield or market cap. We don’t want to be pigeonholed or dependent on any one particular factor to be successful. We want to consistently add value over time through a well-diversified collection of investment strategies while keeping an eye on risk.
In any particular quarter or year it is possible to have a very nicely constructed active portfolio with the subadvisors I mentioned, yet still lag noticeably behind the benchmark if you don’t own the best stocks.
For example, in 1997 and 1998, Exxon Mobil Corporation, Johnson & Johnson and JPMorgan Chase & Co. all did exceptionally well. Those who didn’t own these mega caps fell drastically behind.
In order to avoid this type of market phenomenon we reduced the impact of the natural security selection bias that active managers have (more toward mid-caps or smaller large caps), and added Northern Trust as a final subadvisor. One component of the Northern Trust portfolio is dedicated to mega caps, so it counteracts that bias and balances the overall fund.
Its portfolio is specifically designed to emphasize stocks in the Russell Top 200 Value Index. It helps provide mega-cap exposure while remaining within our risk tolerance. This lessens the impact of the lack of mega cap stocks elsewhere in the fund.
Q: How do you allocate assets to these four subadvisors?
We analyze how each subadvisor will perform both qualitatively and quantitatively. Qualitatively, understanding how each will perform in different market cycles, knowing their strengths, weaknesses and biases, as well as how they approach different phases of the market cycle.
Quantitatively, we look at different risk factors affecting each subadvisor to understand how their return patterns complement each other through excess return correlations. We look at different periods and different market scenarios to understand how much volatility each different strategy contributes.
The Barrow Hanley and AJO portfolios are much more core-like value managers, so they get the largest allocation of the fund.
TCW gets a little less, because they’re focused on companies that are slightly richer than what AJO or Barrow Hanley would own, and also deal with higher volatility stocks. The Northern Trust portfolio gets the residual; its strategy complements the other three and reduces the overall factor risk based on market capitalization for the fund in total.
That is why we do not equal weight our subadvisors across the board and why some get more allocation than others. We look at a combination of how much risk they take and how much excess return we think they can generate relative to their risk.
We’re not trying to make cash timing calls with the strategies, so we keep little residual cash in the total fund. We want as much of the portfolio invested in equities as possible, as this is not only what we consider best practice, but is also what our investors expect.
Q: How do you go about identifying a new manager?
We keep our lineup as fresh as possible by understanding our subadvisors, as well as the firms we have in our bullpen.
We get ideas from many different sources, not only in terms of our contacts and expertise, but also through databases and other technological sources. We have a lot to draw upon and can drill down and focus on the particular areas we most value.
We have a dedicated investment team that meets with nearly 200 managers around the globe every year across all asset classes to learn about their different strategies. That way, if any of our managers stumble or we need to make a change, we’re ready to move in short order. In addition to meeting lead portfolio managers, we meet everyone on a team who has input on whether a security goes in or out of a portfolio.
This is important, because you never know who might be the next generation to lead a firm, move to another firm or start their own shop down the road.
We put in a lot of time upfront getting to know managers before we ever bring them into an assignment on one of the funds. Our get-to-know-you process is quite long, but once you’re in, we tend to be very patient because we know certain strategies will go in and out of favor based on market cycles.
Q: How did you determine that having four subadvisors was the right number for you? What might serve as a reason to look for a replacement manager?
Deciding the number of subadvisors to have is subjective. It is dictated by the asset size of the fund, by the strategies we are trying to consistently capture and by how we can best deliver overall performance over the long-term.
We’ve found that our current collection of subadvisors complement each other well in the mandates we’ve given them. So, at this point in time, four is the right number.
Right now, our fund yield is in line with the benchmark yield. Dividend yield at times goes in and out of favor, so we feel like we have it covered now, but it’s one of the many factors we continue to monitor.
If one of our current subadvisors starts to persistently de-emphasize yield in their strategy, we would see that, have conversations with them and determine whether it is a tactical decision on their part or whether it is a change in long-term strategy that signals a change in their process and philosophy.
Then we would react, which could mean a replacement manager to better carry out our philosophy. However, if we agree with their assessment, we may go out and hire a fifth subadvisor to focus more on dividend yield for undervalued stocks.
If a manager fails to meet expectations, we will not hesitate to make a change. It’s not something we take lightly, because we’re mindful of the transaction costs of changing subadvisors. Sometimes we make tweaks—changing allocation among the different subadvisors, or allowing latitude to utilize a particular type of security, or allocation to an industry or sector—rather than changing managers outright.
Q: What is your investment philosophy?
Our goal is to put together a collection of subadvisors across the U.S. value equity market that trade below their discounted intrinsic value, yet generate dividend yield similar to the value universe average and consistently have a better earnings growth profile than the typical value stock.
We look for organic reasons for a company’s growth to be ahead of its stock price. It is our hope, over the medium to long term, stock prices will catch up with earnings growth. Eventually, we hope our stocks graduate out of the value universe to become growth stocks.
Q: Do you have any examples of how this philosophy plays out?
Our goal is to keep an open and innovative mindset and be flexible to market adjustments. For example, when the fund was created in 2001, real estate investment trusts (REITs) weren’t on the radar of value managers in terms of U.S. long-only equity selections. REITs hadn’t matured at that point.
We gave our subadvisors the latitude to invest in them on a case-by-case basis because we believed there were opportunities within this particular universe. Communication with our subadvisors is a two-way dialog in terms of knowing the market and knowing what opportunities are out there to bring additional value to our clients.
Q: How do you define and manage risk?
We take the most basic approach to risk—if we invest a dollar in the markets, then we want to get at least a dollar back, if not more.
To us, risk is much more about capital preservation. We are able to get there through the diversification we have built into the construction of our fund and by capitalizing on each subadvisors’ strategies and security selection strengths.
We look beyond standard deviation of volatility and examine how much risk we have at the individual security level. Each of our subadvisors manages their own risk, which we monitor and watch, and we manage total risk at the fund level.
One of the things we keenly monitor is style drift, because we don’t want to create a value equity fund that doesn’t meet our investors’ objectives for the fund.
Historically, the overall portfolio beta is typically near 1.0 and yet active share will range toward 70%. Overall we try and manage the fund with an information ratio target of 0.5.
