Interview with Richard Whiteoak by Richard Holdcroft
At first glance the Australian share market may currently look fair value, with no compelling buys obvious to the average investor.
But one contrarian fund manager is focusing on a stark disparity between sector valuations that offers a significant opportunity for above-average returns in the years ahead.
Richard Whiteoak, investment analyst for Allan Gray, explains what has led to this ‘value dispersion’ and how to take advantage of it.
Australia’s economic environment has been characterised by unusually low interest rates and a weakening Australian dollar for some time. Over this period, high-yield shares have become extremely popular.
“Because interest rates have fallen so low, investors have been pushed out of bank accounts and deposits into dividend-paying stocks in order to get a reasonable return of their savings,” says Richard.
Healthcare is a prime example. The Australian market’s most profitable sector over the last decade, it has returned over 16 per cent a year.
“Healthcare is seen as offering stable, reliable growth with good dividends. It has been a magnet for investors looking for dividend yield,” says Richard.
Investors have also enjoyed great returns from the telecommunications, utilities and consumer staples sectors. But one result of this has been increasingly stretched valuations in widely held shares, and Richard says investors should now be looking elsewhere as they position themselves for the next five years and beyond.
“Herding together always makes investing risky. There is now a risk of capital losses in these sectors in the medium term,” he says.
Allan Gray is a fiercely independent and privately owned active fund manager that outperforms the market over the long term by adopting a contrarian, long-term investment philosophy.
Their Australia Equity fund’s current holdings reflect their approach. Although banks constitute 30% of the Australian sharemarket, they are less than 10% of Allan Gray’s Equity Fund.
“Australia has had a remarkably benign economic environment for 20 years, it’s been a terrific time for the banks,” says Richard.
“If the economy heads into a tougher patch, however, they will be very exposed to the downside.”
As a long-term investor happy to forgo short-term returns in the hunt for out-performance, Allan Gray takes positions in companies that are currently unfashionable and can therefore be bought cheaply.
“We look for out-of-favour stocks that we can pick up below fair value,” explains Richard.
“For us to be able to buy a share cheaply, there must be bad news – perhaps missed profit forecasts, bad press, or downward pressure on a sector. For example, we currently see value in areas such as energy and gold.
“Companies with inconsistent profits or dividends, and thus not seen as reliable blue chips, are also great buying opportunities for us right now.’’
At the time of writing, the fund’s largest holding is oil explorer and producer Woodside Petroleum. With sound management and low debt levels, and yet out of favour with the investment community, it is exactly the kind of unpopular share with strong fundamentals that attracts the attention of contrarian investors.
This ‘go against the herd’ investment approach is difficult to implement, as it requires courage of conviction and patience.
Contrarian investing is the most difficult of the investing disciplines, but also has the highest potential for long term rewards. As Allan Gray’s track record has shown over the past 10 years in Australia and 40 years overseas.
Richard Whiteoak holds a Bachelor of Medicine and Bachelor of Surgery from the University of Wales and an MBA from the University of Oxford.