Raging Bull Award for the Best (FSCA-approved) Offshore Global Equity Fund on straight performance over three years to December 31, 2018
Focusing on the long-term value of a business, rather than market sentiment, resulted in Jersey-based Contrarius Investment Management’s Global Equity Fund winning its fourth Raging Bull Award this year. The fund received the award for top straight performance in the offshore global equity general sector in 2017, 2015 and 2014.
According to ProfileData, the Contrarius Global Equity Fund returned 12.44% a year in US dollars (9.64% in rands) over the three years to the end of December 2018, outperforming the 62 other funds in the sector with a performance history of at least three years. The average annual performance for the sub-category over three years was 4.19% (in dollars), while the fund’s benchmark, the MSCI World Index, returned 6.91% a year.
The dollar-denominated Global Equity Fund invests in share markets around the world, and aims to achieve returns higher than the average of the world’s equity markets without greater risk of loss over the long term.
The asset manager’s name best describes its investment philosophy: contrarian.
“Value investing is often focused on finding cheap shares characterised only by low price-to-earnings or price-to-book ratios. As a result, value investors’ often shun high-quality shares with above average long-term growth prospects in favour of companies with below average long-term growth prospects, simply because the latter trade on low multiples and therefore appear cheap. However, in many instances the reason these shares are trading at depressed multiples is not because their prices are depressed but because their earnings have experienced a period of above average growth and are at a cyclical high,” says Heaton van der Linde, a director of Contrarius.
“A contrarian approach, while considering the underlying intrinsic value of a company, is mindful of the earnings cycle and careful to avoid companies that appear ‘cheap’ but which carry substantial earnings and therefore price risk.”
Van der Linde says the largest contributor to the fund’s outperformance over the past three years has been its holdings of resources companies.
“At the beginning of 2016, the fund held significant positions in a number of resources companies whose share prices had, in our analysis, fallen substantially below their intrinsic value. In 2016, these shares rebounded strongly when commodity prices increased moderately from their extreme lows. Over the three-year period, Teck Resources, a North American miner of copper, zinc and metallurgical coal, was the largest contributor among these materials companies,” he says.
“Macy’s, the US department store operator, purchased towards the end of 2017 also contributed meaningfully to the three-year performance. Market participants had sold Macy’s down, together with retailers in general, on the back of a tough environment for brick-and-mortar retailers. Our analysis suggested that the work they were doing on their own online offering and the repositioning of their stores was likely to result in an improvement in their margin over time.
“Another contributor to the three-year return was Apple. We believed that the market was putting too low a multiple on Apple given the strength of its ecosystem and its strong cash flows. We were happy to hold Apple for several years until the market recognised the value and its price appreciated.”
Looking at the opportunities in the year ahead, Van der Linde says Contrarius believes that the valuation disparity within the market is very high, with many companies trading well below their previous highs and its assessment of their fair values. As such, the fund has been positioned to take advantage of:
Companies, such as Facebook and Twitter, where Contrarius believes their long-term earnings potential is being under-appreciated by the market;
Companies, such as selected US retailers, trading on low multiples of what Contrarius believes to be depressed earnings; and
Companies, such as selected energy companies, whose profitability has been severely impacted in the short term to medium term, but which Contrarius believes are trading well below its assessment of their long-term fair value.