Stock picking based on fundamentals puts global equity fund on top
ALLAN GRAY-ORBIS GLOBAL EQUITY FEEDER FUND (A)
Raging Bull Award for the Best South African-domiciled Global Equity General Fund on straight performance over three years to December 31, 2017
Certificate for the Best South African-domiciled Global Equity General Fund on a risk-adjusted basis over five years to December 31, 2017
ORBIS GLOBAL EQUITY FUND
Raging Bull Award for the Best FSB-approved Offshore Global Equity Fund on straight performance over three years to December 31, 2017
Certificate for the Best FSB-approved Offshore Global Equity General Fund on risk-adjusted performance over five years to December 31, 2017
Ignore market trends and how other asset managers are investing. Focus on a company’s fundamentals. Applying this formula resulted in the Orbis Global Equity Fund and its rand-denominated feeder fund winning Raging Bull awards at this year’s ceremony.
“Orbis and Allan Gray share the same investment philosophy and process. We focus entirely on finding the most compelling individual opportunities on offer. We do this regardless of what is in fashion or what our peers are doing,” says Tamryn Lamb, the joint head of institutional client services at Allan Gray.
There were 37 funds in the rand-denominated global equity general sub-category with a performance history of at least three years at December 31, 2017. The average annual return was 9.79%, according to ProfileData. The Allan Gray-Orbis Global Equity Feeder Fund produced an annual average return of 16.13% over the same period, while the benchmark for the sub-category, the MSCI World Index, returned 9.62% a year.
The fund has been a consistent out-performer over the long-term. It had the highest return, 13.89%, over 10 years and the second-highest return of 24.07% and 21.47% over five and seven years respectively.
The feeder fund invests fully in the dollar-denominated Global Equity Fund managed by Allan Gray’s Bermuda-based sister company, Orbis. The only difference between the two funds is that the units in the feeder fund are priced and traded daily in rands. There may be a slight difference in the returns of the two funds because of cash-flow and timing.
The benchmark for the Orbis Global Equity Fund is the FTSE World Index (including income). Since the Allan Gray-Orbis Global Equity Feeder Fund was launched in April 2005, the fund has produced an annual return of 15.7% in rands, or 9.7% in dollars, versus the FTSE World Index’s 13.6% in rands, or 7.7% in dollars.
The average annual return of the 59 funds in the offshore global equity general sector with a three-year performance history was 9.34% in rands, or 6.87% in dollars.
The Orbis Global Equity Fund provided an average annual return of 16.09% in rands, or 13.47% in dollars, over the three years to the end of December last year, according to ProfileData. The top-performing fund in the offshore global equity general sector, the Fundsmith Equity Fund, returned 18.55% in rands (16.12% in dollars), but this fund was not eligible for a Raging Bull Award because it was registered in June 2016, whereas a fund must be registered for at least three years to qualify.
Both the feeder fund and the global equity fund also received certificates for top risk-adjusted performance over five years. Both funds received the highest PlexCrown rating of five PlexCrowns, which means they consistently delivered the best returns without taking too much risk.
Allan Gray attributes the Orbis Global Equity Fund’s superior performance to its investment philosophy, which is to buy shares for much less than they are worth.
“Shares are nothing more than fractional ownership interests in a business. If our analysts can truly understand the fundamentals of a given company, we can determine whether the price the stock market is offering is cheap or expensive relative to the intrinsic value of the business” says Lamb.
“Compelling investment opportunities often arise when investors place too much emphasis on short-term developments at the expense of long-term fundamentals. Capitalising on excessive pessimism lies at the heart of our investment philosophy. We believe that share prices must ultimately reflect intrinsic value, and we are prepared to wait patiently until our investment thesis plays out.”
Lamb says that NetEase, XPO Logistics and Sberbank are three of the shares that contributed significantly to the fund’s performance over the past three years.
The fund has owned shares in NetEase, which is one of the largest online game operators in China, since 2008.
“We were attracted by its excellent management, substantial research and development capability, and track record of bringing games successfully to the market. It was also expected to be a key beneficiary of the trend of increasing internet penetration in China. Most importantly, this growth potential was not reflected in its share price, especially given its strong balance sheet. By the end of 2014, the share price had risen, but so too had its intrinsic value,” Lamb says.
“The market was very concerned that NetEase’s games, which were played on PCs, would not be as popular on mobile phones. The company has since made this transition successfully and has developed other business lines, such as e-commerce, and we continued to believe its share price didn’t reflect its growth potential at December 31, 2017.”
XPO Logistics is a United States-based company that provides a range of transportation and logistics services.
“We first bought XPO in 2013. In 2015, XPO spooked investors when it announced its acquisition on Con-Way, a trucking and logistics company, during an increasingly edgy market environment. This upset the market, as trucking companies were perceived to generate low returns on equity, and were asset-intensive. Con-Way, in particular, was viewed to be a poor-quality business. Additionally, the proposed deal would significantly increase XPO’s debt load, thereby increasing XPO’s overall sensitivity to economic cycles. The share price was penalised heavily as a result. Our analysis concluded that the market’s fears were likely exaggerated and, even under pessimistic assumptions such as another financial crisis, we believed that XPO could still comfortably meet its financial obligations. We took advantage of this and significantly increased our holding.
“In 2017, XPO reported consistently good results, and not only achieved meaningful margin expansion as it executed on the integration and improvement of previously acquired businesses, but also reported accelerating organic growth,” Lamb says.
Sberbank is Russia’s largest and most profitable bank. Lamb says the fund first looked at the company in mid-2013 and was encouraged by management’s drive to make Sberbank a more Western-style bank.
“While the fundamentals were attractive, and Sberbank’s valuation compared favourably with its global peers, we decided not to invest, as we concluded the margin of safety was insufficient to justify deploying our clients’ capital.
“In late 2013 and 2014, Sberbank shares underperformed the world markets, causing us to revisit the stock. With the share price close to the value of its tangible net assets, we concluded that the company’s considerably competitive advantage and future growth potential had become under-appreciated and we subsequently invested,” Lamb says.
“At December 31, Sberbank was a top-10 holding within the Global Equity Fund, as we continued to believe that it traded at a very compelling discount to its intrinsic value on an absolute basis and, on a relative basis, to its banking peers elsewhere in the world.”
Lamb says the FTSE World Index rose 24% in 2017, keeping the current bull market alive for a ninth year.
“While this has been great for global equity investors, future stock market returns do not look appealing at current valuations. Fortunately, we do not need to invest in ‘the market’. Instead, we can focus on finding the most compelling individual opportunities on offer. It is during times like these that blindly following an index can be particularly dangerous – and in which our style of idiosyncratic stock-picking can really earn its keep,” Lamb says.