Interview with Julian Morrison by Richard Holdcroft
Investors in the Australian Stock Exchange typically hold their shares for less than 12 months. But to add value to an investment portfolio sustainably requires a very different strategy - and an investment manager who is comfortable with being very different from the crowd.
Allan Gray is a fiercely independent and privately owned active fund manager that has achieved long-term outperformance by adopting a contrarian, long-term investment philosophy.
Allan Gray’s national key account manager, Julian Morrison, explains this “outside the box” approach is built on four key factors.
1. Alignment of interest
An investor needs to know their fund manager will act in their best interests, but this is often not the case.
A classic example of this is when a fund manager adopts a popular investment strategy to avoid underperforming relative to their peers.
“Active managers are often too scared to deviate from the crowd, and instead tend to hug the benchmark or stick to widely held equities and strategies,” Julian says.
“At Allan Gray, we believe fund managers should be prepared to have clients leave them for short-term under-performance if that is the result of the manager’s investment beliefs.
“Our approach requires us to see everything long term. Patience is critical.”
Furthermore, Allan Gray’s senior executives are themselves shareholders in the business and also maintain substantial personal investments in the funds the company operates. This too ensures their interests remain aligned with those of all their investors.
2. Think like a business owner
People who started businesses dominate rich lists around the world. And the reason for that is simple, says Julian: because they bought equity cheaply as founder capital.
‘Think like a business owner, and acquire your equity as cheaply as you can. This mindset is one of the very best tools an investor can have.”
Central to this approach is taking the long view rather than a share trader’s position.
“Investors often find it difficult to think long-term,” says Julian.
“There is a constant temptation to attempt to buy a share in anticipation of a near-term price rise, and the constant flow of information on companies, markets and economies can overwhelm rational thinking.”
Many of the assumptions investors make are based on studying the past in the hope that it represents normality, but the truth is that we simply do not know.
“Investors tend to be overconfident in their ability to interpret information, and in their willingness to rely on accepted ‘truths’,” says Julian.
“Accept that your outcome will be affected by factors you don’t know about.
“This requires an active manager to seek out potential investments which can be purchased at a discount to compensate for uncertainty, and to focus their research efforts on those few factors with reliable indicators, for example the competitive landscape, and sustainable profit margins.”
4. Oppose consensus
The key to Allan Gray’s success is their contrarian investment approach. “If a share is popular, it isn’t cheap, so the potential return is probably mediocre, or even dangerous,” says Julian.
A contrarian investor such as Allan Gray asks: Which companies’ shares will people sell me at a low price?
Shares that are out of favour because they have been vilified by the media, for example, can be a great buying opportunity for an investor who can resist the herd mentality.
“As a buyer in these circumstances, you face less competition,” says Julian. “You’re at an auction where nobody else is bidding.”
The Allan Gray Australia Equity Fund is targeted at those who are able to remain invested for at least five years.
With no pressure to follow the herd and deliver short-term results, the fund’s managers are able to think strategically and follow their investment convictions.
This ‘outside the box’ approach is the competitive advantage that has enabled them to outperform the market over almost 10-years in Australia, and for more than 40 years overseas.
Julian Morrison holds a Bachelor of Arts (Honours – University of Sheffield) and the Chartered Financial Analyst designation.