Interview with Simon Mawhinney by Richard Holdcroft
For some years now, the flow of investor funds into the Australian Stock Exchange (ASX) has been dominated by one consistent and powerful trend. The prolonged period of low interest rates has herded investors towards the shares of quality companies offering growth and the promise of stable or growing earnings. But this situation may be about to change, says Allan Gray chief investment officer Simon Mawhinney.

“Not since the tech wreck have we seen this level of trending, with so much concentration in a few specific shares,” says Mr Mawhinney. “It’s been a successful investment approach for some time now.” The result is that the winners of 2010 are still the winners today.”

These ‘winners’ have been found in sectors such as banks, telcos, REITS, healthcare, infrastructure and utilities. But as a result of their prolonged popularity, these stocks are now trading at very high multiples of their underlying fundamental drivers, particularly their earnings and book values. As a result, he says, a large number of the remaining traded equities are extremely undervalued and some now represent a great buying opportunity.

Allan Gray, a fiercely independent and privately owned active fund manager, is known for its contrarian investment philosophy.

Over the last 12 months, it has begun moving its equity funds into cyclically depressed stocks. These are found in such unloved sectors as energy, consumer discretionary, certain resources, and gold, which have been available at attractive discounts.

A contrarian investment approach requires courage of conviction and patience, and these moves have yet to bear fruit. However Allan Gray adopts a minimum five-year investment horizon and is comfortable with the fact that identifying the precise turning point in an economic cycle is impossible.Pic for Simon Mawhinney story GettyImages-88621005.V2.Resized

“The last year hasn’t been pretty,” concedes Mawhinney. “But as Baron Rothschild said, “the time to buy is when there’s blood on the streets”. When news is very bad and stocks are unloved that’s when we look to invest.”

To pick the winners of the next economic cycle, Allan Gray sticks to a few simple rules. Conducting all their own research in-house, its analysts seek out companies with high-quality management and strong balance sheets.

Mawhinney says it is also important to look at companies with quality underlying assets or some other competitive edge.

“For example in resources plays one might look for long-life deposits, eg a gold mine with a 30-year life, and for deposits low on the cost curve,” says Mawhinney.

As a smaller and more nimble investment house, Allan Gray is also able to capitalise on promising stock picks with capitalisations that are simply too small to interest the large fund managers.

Mawhinney points to engineering firm UGL as an example.

“UGL probably represents 2 to 3 per cent of our portfolio,” he says, “but many other fund managers have no exposure. We believe it’s a fundamentally sound business with no debt, but it is at a difficult point in the cycle.”

It is contrarian picks such as these that Mawhinney believes will over time enable Allan Gray to outperform the market in a long-term, sustainable fashion in line with Allan Gray’s 40-year-plus track record globally.


Simon Mawhinney holds a Bachelor of Business Science (First Class Honours) with majors in Finance and Business Strategy and a Postgraduate Diploma in Accounting (University of Cape Town). Simon qualified as a chartered accountant in 1998 and is a CFA Charterholder.