GuideStone Defensive
Market Strategies Fund
GDMZX | INVESTOR SHARE CLASS
GDMYX | INSTITUTIONAL SHARE CLASS
At GuideStone, we believe investors are increasingly looking beyond traditional style boxes and benchmark-relative
performance for better portfolio design. They are interested
in investment solutions that are risk-managed, provide true
diversification and utilize the latest in advanced portfolio construction techniques.
The Defensive Market Strategies Fund (Fund) takes a
multi-manager, multi-strategy approach to investing by blending complementary managers and strategy types in pursuit
of a risk-efficient portfolio. The Fund seeks to capitalize on
value-add concepts and alternative investment approaches,
while incorporating certain traditional strategies to reduce
costs, eliminate leverage and better manage risks.
OBJECTIVE
The Fund is actively managed and provides investors who have a medium- to long-term time horizon with the ability to participate in the return
potential of stocks. This may be of interest because the Fund pursues
this objective while pursuing a risk level that is lower than a traditional
stock portfolio. The Fund is not intended to be a stand-alone investment
solution, but a component of a broadly diversified portfolio to generally
be held alongside other equity investments. The Fund’s design also provides risk-sensitive investors with an option to remain strategically allocated to equities or equity-like securities, rather than make reactionary
moves to cash or fixed income.
The Fund’s objective is to provide long-term capital appreciation with reduced volatility compared to the equity market. Active management and
intelligent portfolio design are intended to result in the Fund performing
in line with traditional long-only equity portfolios over time.
The Fund strives to achieve its investment objective by:
• Reducing volatility
• Emphasizing diversification of strategy types
• Utilizing active management to deliver better risk-adjusted returns
• Delivering greater diversification and lower risk by capitalizing on
structural market inefficiencies
BENCHMARK
The Fund’s benchmark, comprised of half equities and half cash equivalents, was selected to best reflect the risk profile of the Fund. In managing the Fund, GuideStone targets a beta, or market sensitivity, of 0.5
to the S&P 500® Index.* The Fund’s composite benchmark consists of:
• 50% S&P 500® Index
• 50% Citigroup 3-Month Treasury Bill Index
STRATEGY
The Fund’s broad investment strategy is to pursue the return potential
of stocks by allocating assets among various investment strategies,
each with the objective of delivering equity-market-like returns over a
full market cycle at lower risk levels. By allocating to an assortment of
investment strategies, greater diversification and lower risk are sought.
GuideStone believes various structural market inefficiencies may exist
due to behavioral biases, such as fear and greed, as well as other technical factors.
Greed can lead investors to overpay for upside potential, while fear may
lead investors to overpay for downside protection. GuideStone asserts
these behavioral biases contribute to two enduring structural market inefficiencies on which the Fund seeks to capitalize:
Beta Anomaly
An abundance of literature, academic research and empirical research
have demonstrated that higher-beta stocks have not historically outperformed lower-beta stocks over longer time periods.1 The Fund capitalizes
on this anomaly by targeting and investing in underpriced, lower-beta
and lower-volatility stocks, thus enhancing risk-adjusted returns.
Insurance Risk Premium
Historically, volatility is overpriced in the marketplace, as investors systematically overpay for both downside protection
by purchasing put options and upside potential by purchasing call options. A portion of the Fund capitalizes on this by
selling fully covered call and put equity index options to monetize on
the behavioral biases that lead to systematically overpriced options.
INVESTIBLE INSTRUMENTS
While the Fund has some latitude in the investment securities in which
it can invest, the Fund gains market exposure predominately via equities (common and preferred stock), equity index options and convertible
bonds.
The Fund invests mostly in U.S. securities, but, to a lesser extent, may
invest in non-U.S. securities.
INVESTMENT PROCESS
The Fund is managed utilizing a manager-of-managers investment philosophy and process whereby GuideStone Capital Management, LLC
(GSCM) serves as the Fund’s adviser. GSCM establishes the overall portfolio management construction of the Fund, including objective, strategy,
allowable exposures and risk/return profile.
The Fund has four sub-advisers who make the day-to-day buying and
selling decisions related to securities within the Fund in accordance
with the parameters established by GSCM. GSCM is responsible for
the hiring, monitoring and termination of the sub-advisers, as well as
the allocation of assets among them. GSCM diligently and thoughtfully
constructs funds using a multi-manager structure, whereby sub-advisers
are chosen on the basis of their respective competitive advantages
and roles they play within the Fund. The Fund currently employs four
sub-advisers, each with unique investment styles that cover the major
investment strategies, including long-only equity, convertible bonds and
options equity.
Across these strategy types there also is diversification by including
strategies that are:
•
•
•
•
Quantitative and fundamental
Systematic and discretionary
Higher and lower risk than the benchmark
Value, growth and core oriented
RISK MANAGEMENT
Risk management is central to the investment process at GSCM and
plays a strategically important role in the design of the Fund. Risk
management is at the epicenter of the portfolio construction process
for the Fund, which is specifically designed to target reduced volatility
compared to investing in the broad equity market. GSCM utilizes a multistrategy, multi-manager approach to managing risk and targets a beta to the
S&P 500® Index of approximately 0.50 — meaning the intention is to have
half the equity market sensitivity compared to this Index.*
ADVANTAGES
The Fund provides a wide range of potential benefits for investors,
including:
Active management
The Fund follows an active management philosophy and seeks to add
value through rigorous fundamental research and robust quantitative
processes.
Better risk-adjusted returns
The Fund is designed to be risk-efficient, delivering more return at less
risk for investors.
Enhanced diversification
The Fund’s multi-strategy approach improves diversification, which is
intended to increase the probability of success for investors.
Delivery of superior beta
The Fund implements investment solutions designed to capitalize on enduring structural market inefficiencies that exist due to behavioral biases
and other technical factors.
Reduction in overall volatility
The Fund is managed to have investment returns consistent with the
equity market but with lower volatility.
Greater downside protection
The Fund’s lower beta and risk orientation will help to limit losses in
equity market sell-offs, thus potentially preserving capital and allowing
the power of compounding to work for the investor.
Sub-advisers
Target
Allocation
Strategy Type
Sub-adviser Objectives
American Century
Investment Management
33%
Long-only Equities
and Convertible
Bonds
• Provides lower-risk equity exposure and increased income.
• Delivers a fundamentally based, higher-dividend-yielding U.S. stock portfolio with tactical
exposure to convertible securities.
• Focuses on high-quality businesses selling at a discount to fair value, which can generate
superior risk-adjusted returns over time.
• Manages risk via a strict sell discipline and by establishing a risk-reward profile for each
stock that leads to a higher probability of success.
AQR Capital Management
22%
Long-only Equities
• Purchases stable, lower-volatility and lower-beta equity securities by focusing on fundamental measures of quality.
• Carries out a quantitatively driven process to provide exposure to lower-beta stocks in a
risk-efficient way.
• Seeks to perform in line with broad U.S. equity market returns, but with less risk and better
diversification.
• Implements robust, proprietary optimization techniques that lead to less concentrated and
better optimal portfolios.
• Reflects stock selection views and portfolios that produce more stable returns across
changing market environments.
1
Sub-advisers
Target
Allocation
Strategy Type
Sub-adviser Objectives
Parametric Clifton
22.5%
Options Equity
• Sells fully covered equity index options to monetize on behavioral biases of fear and greed
that lead to systematically overpriced options.
• Believes selling equity index options is a more reliable means of generating consistent
excess returns above cash rather than holding a long-only equity portfolio.
• Targets a premium over cash from selling equity index options similar to that of the historical equity risk premium.
Shenkman Capital
Management
22.5%
Convertible Bonds
• Maintains a conservative convertible securities portfolio backed by strong credit research to
provide equity upside with relative safety of the fixed income floor.
• Purchases convertible securities with compelling risk-adjusted return profiles.
• Purchases lower-risk, convertible bonds closer to their par bond value to minimize downside
risks, while also possessing upside potential of transitioning to increased equity sensitivity.
Jayendran Rajamony, Ph.D., and Shanra Puchtler, CFA, What is Minimum Variance and How Does it Work? (Boston: Numeric Investors, 2011).
RISK SUMMARY
The Fund’s strategies individually are subject to certain risks, as summarized below.
The value of convertible securities generally increases and decreases with the value of the underlying common stock, but may also be sensitive to changes in interest rates. When
interest rates rise, the value of the existing bonds decreases and vice versa. High-yield debt securities may entail greater credit risk and be less liquid than bonds rated “investment
grade.” Foreign securities may be subject to greater risk than domestic securities due to currency volatility, reduced market liquidity and political and economic instability. To the extent
that the investment advisor misjudges current market conditions, the Fund’s volatility may be amplified by its use of short sales and derivatives, and by its ability to select sub-advisers
to allocate assets. Short sales by a Fund theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Leverage may increase
the risk of loss and cause fluctuations in the market value of the Fund’s portfolio to have disproportionately large effects or cause the value of the Fund generally to decline faster than
it would otherwise.
Although the combination of the Fund’s individual strategies is intended to reduce risk (volatility) while providing capital appreciation, there is no guarantee that the Fund’s strategies
will work effectively together to achieve the Fund’s investment objective. It is possible to lose money by investing in the Fund.
The Fund expects to have a high portfolio turnover rate due to short-term trading. High turnover could produce higher transaction costs for the Fund and taxable distributions that
lower the Fund’s after-tax performance.
Learn more about GuideStone’s Defensive Market Strategies Fund by visiting GuideStoneFunds.com or calling
1-888-GS-FUNDS (1-888-473-8637).
*Objectives followed by the sub-advisers and investment methodology are established by GSCM and are not formal policies of the Fund and are subject
to change at any time.
You should carefully consider the investment objectives, risks, charges and expenses of the GuideStone Funds before investing. A prospectus with this and other information about the Funds may be obtained by calling 1-888-GS-FUNDS (1-888-473-8637) or downloading one at
GuideStoneFunds.com. It should be read carefully before investing.
GuideStone Funds shares are distributed by Foreside Funds Distributors LLC, not an advisor affiliate.
Investor shares require a minimum investment of $1,000, while Institutional shares require a minimum investment of $1 million.
GLOSSARY
BETA
Beta is a measure of a fund’s sensitivity to broad market movements as defined by a benchmark, such as the S&P 500® Index. A fund with a higher beta relative to the benchmark
is more volatile than the benchmark, and a fund with a lower beta relative to the benchmark can be expected to rise and fall to a lesser degree than the benchmark.
VOLATILITY
The range of a fund’s returns over time, meaning how widely the returns vary from one another. More formally, volatility is the dispersion of a fund’s returns around the fund’s
average (mean) return during a specified period, as expressed by statistical measures such as variance and standard deviation.
© 2015 GuideStone Financial Resources
26030 06/15