Fund's hedging strategy offsets risks of investing in equities
ORBIS OPTIMAL SA FUND
Raging Bull Award for the Best (FSB-approved) Offshore Global Asset Allocation Fund on a risk-adjusted basis over five years to December 31, 2017
A hedging strategy employing stock futures to counter any volatility in its equity investments has given the Orbis Optimal SA Fund the edge over its peers to win the Raging Bull Award in the risk-adjusted category for offshore asset allocation funds.
The fund, managed by Allan Gray’s offshore partner, Orbis, which is based in Bermuda, is designed for investors seeking capital appreciation in a low-risk global investment portfolio.
The portfolio is invested in carefully chosen equities but employs a hedging strategy to reduce volatility and the probability of capital loss. It is denominated in United States dollars.
There were 48 qualifying funds in the PlexCrown Fund Ratings global offshore asset allocation flexible category, and the Optimal SA Fund was one of five funds that received the top rating of five PlexCrowns.
According to the fund’s December 2017 fact sheet, the portfolio achieved an annualised net return of 4.6% a year (in dollars) over the five years to the end of last year, but with far lower downside risk than the average global equity fund, which returned 8.3% over the same period.
The fund’s annualised monthly volatility, according to the fact sheet is 5.2%, as against 15% from an average global equity fund.
Tamryn Lamb, the joint head of institutional client services at Allan Gray, says the Orbis Optimal SA Fund is designed for clients seeking exposure to Orbis’s global stock-picking capabilities, while also wanting to substantially reduce the risks inherent in stock-market investments.
“The strategy primarily does this by investing in our favourite stocks from around the world and then selling a basket of stock index futures to offset stock market risk. The net result is that the Optimal fund’s performance is predominantly driven by the relative returns of our stock selections (termed ‘alpha’) rather than the direction of the stock market (termed ‘beta’).
“It is important to recognise that, while a hedged strategy comes with less stock market risk than equities alone, it also sacrifices the returns that come from market movements,” Lamb says.
Lamb says individual shares outperforming their respective indices were the largest driver of positive returns for the Orbis Optimal Fund for 2017 (it returned 6.6% for the year). In particular, stock selection in North America and Japan was the biggest contributor to alpha for the year.
“Nexon, a Japan-listed developer and operator of online games, was one of the biggest contributors at the individual stock level. Nexon reported very strong results during the course of the year and also launched several new PC and mobile games, which should contribute to revenue growth. Nexon was a significant position in the fund at the end of 2017.
“Apache, a US oil and gas exploration and production company, was the largest detractor after reporting slower-than-expected progress in developing its Alpine High field in West Texas. However, the stock continued to be a significant holding at December 31, last year,” Lamb says.
She says the final quarter of 2017 did not bring much in the way of change to the portfolio, which remains broadly skewed towards shorter-dated assets and away from the shares of highly stable and predictable businesses.
“We continue to find concentrations of value in a number of areas, including financials and resource businesses.”
When asked how the fund is positioned for 2018, in light of a possible equity market correction on the back of high valuations and possible rises in interest rates, Lamb said: “We have no insight into the direction of the overall market in the next few years, but we can say that persistent price rises have pushed up earnings multiples and squeezed down dividend yields, and that this places a dent in the market’s long-term return potential.
“While the potential return for taking on ‘beta’, or stock-market risk, has fallen, we continue to observe a constructive ‘alpha’ environment. The gap in attractiveness between what we consider to be the most underpriced and most overpriced shares appears above normal.”