It’s been a difficult year or so for fund manager Allan Gray, but the contrarian investment house has no intention of backing down from its strategy of searching for value in unloved and under-priced stocks.
Speaking at the Allan Gray and Orbis Investment Forum in Sydney, Allan Gray portfolio manager and analyst Suhas Nayak was candid about the recent performance of the firm’s flagship fund.
“Performance has been weak in the past year or so,” Nayak revealed. “The Allan Gray Australia Fund had a difficult year; we’ve underperformed the market as a whole.”
Nayak said the fund had underperformed the benchmark by “about 3 per cent”, driven by low volatility and the underperformance of cyclical companies.
The Australia Balanced Fund and the Australia Fund have fared slightly better, he explained, yet the firm has suffered underperformance “across all three asset classes”.
The recent run, however, will not change Allan Gray’s belief in contrarian investing. True to form, Nayak said the firm is doing exactly what it should be doing and doubling down on its strategy.
“As contrarian investors you would expect us to do what we’ve done, which is to lean into that underperformance and buy more of those cyclical companies,” he told the crowd of mostly retail investors and advisers.
The philosophy is consistent with Allan Gray’s contrarian style. Betting on the ugly-ducklings of the market like AMP and Telstra isn’t for everyone; it’s not for the short-term investor and certainly not for the faint-hearted. In September Allan Gray’s national key account manager Julian Morrison spoke to Professional Planner as part of its InFocus content series about the challenge of zigging when everyone else zags.
“There’s a reason why there’s no competition there,” Morrison said. “The trick to pulling those investments off is to have a level of patience uncommon in the industry.”
Rohan McPherson, director and adviser at FIRSTUNITY Wealth Management and long time investor in Allan Gray, explained how “uncomfortable” it could get dealing with extended periods of underperformance.
“They often hold some really unsexy stocks, but the name of the game is finding intrinsic value in a company, and I think if you’re not stressed about something in your portfolio you’re not really diversified,” McPherson said.
‘Money bubble’
Allan Gray’s sister company, Orbis Investments, has also had a rough trot following a contrarian philosophy. Investment director Charles Dalziell said the “tough” market had led to the firm’s ten-year alpha dropping below zero for the first time in 30 years.
“This is worrying for us and worrying for our clients,” Dalziell said. “The last 18 months have been quite difficult, we’ve experienced one of the biggest drawdowns in our 30-year history.”
Value managers were beating the market for 80 years, he said, simply by buying the cheaper shares. From 2000 to 2006, he explained, the tail really wagged. “In 2006 everyone wanted to be a value investor and was quoting Warren Buffett,” he said.
Since then, growth managers have profited from the success of companies like Amazon, Apple, Google and Microsoft. He cited Bloomberg figures stating that 280 value fund managers have gone out of business in the last ten years.
Dalziell calls it a “money bubble”; while the performance of these companies has justified growth investing it has caused a valuation gap, or a “dislocation between economic fundamentals and price”, which is dangerous for investors.
Director of Orbis, Ben Preston, supported this view and pointed to the resilience of value investing.
“A lot of the shares that are tracking at really high multiples on this perception of safety have actually strayed into perhaps dangerous territory,” Preston said. “There’s a widespread opinion out there that perhaps value investing is dead. It’s been said before and it hasn’t been true before.”
