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?
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?
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?
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?
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?
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?
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.
Q: What advantages do multi-manager strategies have over single-manager funds?
With a multi-manager strategy, you are not just hiring the manager with the best performance over a short period of time. Having five managers provides diversified exposure across the investment universe and over a long period of time.
The multi-manager approach is our expertise and it gives us an advantage over the long term, as opposed to just hiring the latest and greatest performer.
