Orbis Investment Management (Orbis) considers its approach to be contrarian, prioritising long-term returns and patience over momentum, trends and macroeconomic factors.
Working with the motto, “invest differently”, the asset manager emphasises the importance of value, looking for investment opportunities which show promising fundamentals while keeping faith with its selections even during extensive periods of underperformance.
Of course, many market participants have been predicting the rotation into value stocks for some time, as growth stocks have dominated for last few years. However, Marcel Bradshaw (pictured), Orbis’ head of UK retail, says that the company has always been prepared to “not follow the herd”.
He points to a timeline, dating back to the foundation of Orbis in 1989, of the asset manager avoiding the investment consensus. It stayed away from Japanese stocks in the in the early 1990s, minimised exposure to technology at the turn of the century, and mostly eschewed emerging markets in the early-2010s before embracing the sector in more recent years.
Founded by Allan Gray, his contrarian style of investing still informs many of its current stock pickers. Regarding Japan, while the firm stayed away from the market during the 1990s, Mr Gray was attracted to it in 2000s, despite it being in a bear market for the best part of decade. Ben Preston, a fund manager at Orbis, remains bullish on Japanese car manufacturer Honda, despite the fact that last year saw it trading at a 40 percent discount to its assets, when it used to trade on an identical premium.
Orbis is open about its periods of underperformance, with the company’s literature stating that “underperformance is the price we must pay for seeking superior long-term returns”.
When picking stocks for its three OEIC funds in the UK retail market: the Global Equity Fund, the Global Balanced fund, and the Global Cautious fund, it makes an assessment of the value of each business it considers investing in.
Orbis ignores short-term considerations and prioritises fundamentals, typically buying when the stock market’s assessment of the business is at its least favourable. This results in a cheaper share price. It then aims to hold on to the stock for a 3-5-year period, maintaining it through an expected period of turbulence before maximising returns.
“What we are willing to do, because we have the breadth and the depth with our 43 analysts, is to go and look and search for above-average companies that are currently trading at a substantial discount to each intrinsic value. We are also comfortable to hold it for a period, even when it can become more uncomfortable – as we have seen over the last few years,” Mr Bradshaw explains.
Its 43 analysts are based all over the world, working in 10 offices with teams focused on the US, Japan, Europe, emerging markets and the global sector. Its Global Equity strategy uses five stock pickers to direct client capital into the ideas with highest conviction levels while one manager, William Gray, has overall accountability for the approach.
With its Global Equity strategy, stocks go through both a fundamental research period and a thesis phase, where the stocks are debated in a form of peer review, before factoring in risk and currency issues.
The fund’s top holding is NetEase (8.4 percent), a Chinese communication service. Also featuring in its top 10 are British American Tobacco (5.7), Honda Motor (3.4) and Facebook (2.5). Meanwhile, the very popular information technology stock, Taiwan Semiconductor Mfg is the top holding in its Global Balanced fund.
When questioned on how different these stocks are to the picks made by other fund managers, Mr Bradshaw says that it’s the process that defines its contrarian nature.
He explains: “At no point are we going to say all our stocks are going to be very different. It’s not as if we are always going to be in a situation where we find these stocks, and no one else can find them. You will find stocks out there that are seen by other managers at a certain point in time.”
This approach could be described as “buying low and selling high”, which is hardly a ground-breaking economic philosophy. Mr Bradshaw believes what sets Orbis out from its competitors is its ability to not just spot bargains, but its global approach.
He notes that across its three funds, Orbis is “slightly overweight” in the UK, but it isn’t focused on them simply because domestic equities are increasingly perceived as an attractive investment opportunity after Brexit. Instead, it’s part of its worldwide strategy.
“Because we turn around stones so wide, we are finding bargains everywhere. We are also finding them in emerging markets, and we are finding them in Japan,” he adds.
Nevertheless, expense is a factor, with Orbis believing that low volatility shares are expensive, with stretched fundamentals. It also considers the gap between the most valued and overvalued areas of the market to have widened, providing it with an opportunity to make great returns provided the asset manager is prepared to play the long game.
Another area of interest for prospective clients looking at Orbis is its fee structure. If any of its three funds do not outperform the market, then there are no charges- they even receive refunds from periods of outperformance. In the last 12 months, Orbis’ investors have not had to pay a penny in fees to either the Global Balanced Fund or the Global Equity Fund.
“Value managers in the past five years have had it pretty tough. Some will argue we are a dying breed, but we have kept pace and that is where our fee model comes in,” he says.
Mr Bradshaw argues that although this fee structure helps it stand out from the crowd, it has minimal influence on the strategy of its funds.
He says: “There is a saying “You can’t put lipstick on a pig”, so even if you the most wonderful fee structure if you are not doing well it won’t help you. Our investment philosophy: long-term fundamental and contrarian, is supported by our structure. This includes the alignment of interests, private ownership and individual accountability, so that for example, our Japanese manager has individual accountability. This means he can choose the stock.”
“Having skin in the game, and being aligned with our investors, means they are more supportive of our investment philosophy,” he adds.
This outlook does not seem to have harmed the health of the company, with Orbis now holding £27 billion in assets under management.
Commenting specifically on the relative underperformance of its two best known funds in the past 12 months, he says: “No one knows whether value is going to do well, we only know afterwards. Even us, we only know afterwards. We can’t tell you what the catalyst is going to be. We know for example, that when bond yields go up it should help. Sorting out the trade negotiations between the US and China should help, but we don’t know whether value is going to keep doing well or not. We would argue you can’t time it.”
It seems as though the future success of Orbis, and its emphasis on value, remains unclear. Perhaps as Mr Bradshaw keeps reiterating, time will tell.
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