Allan Gray recently held its March Investment Forums in the capital cities of Australia. This review by freelance journalist Emily Chantiri highlights the key messages from the Forum.
Speaking to an audience of hundreds of advisers and investors at the Allan Gray March Investment Forums, Allan Gray Australia’s Managing Director and Chief Investment Officer Simon Mawhinney said he wanted to focus on the challenges, rather than on the best performing shares.
“Our strike rate for stock selection is 60 percent, which is significantly higher than the industry average, but it is always good to talk about the things that haven’t gone well as well as the successes,” Mawhinney said.
“As an investment team, we learn a lot through this. For clients and prospective clients it’s informative; it helps frame the decisions we make and to understand our investment philosophy.”
Mawhinney noted that Allan Gray’s strategy is to take a long-term approach when investing in shares, with entry to exit typically taking around five years. “When we value shares we do it on a case-by-case basis, as the valuation gap differs widely from company to company. Some are riskier than others, whereas some are more stable in their likely future earning streams and these are easier to predict.”
What causes mistakes?
“Most of the errors are made when trying to time the buying and selling of shares. The reality is that timing the stock market well is very hard. Buying a share at exactly the bottom of its price cycle, or selling it at exactly the top, is exceptionally difficult, it’s virtually impossible. The other area where miscalculations can occur is in research.”
Mawhinney then drew attention to a missed opportunity, Whitehaven Coal Limited.
“We chose not to invest in Whitehaven and yes, it turns out we did our investors a disservice.”
“We had not long lost capital from investing in Arrium Limited and we saw some similarities between the stocks. Our reasons for avoiding Whitehaven came down to probabilities: the net debt of the company increased significantly over a short period due to the development of one of its mines. With high net debt and low cash flow, this was a red light. But while the warning signs of the two companies were the same, Whitehaven’s share price went on to rise by more than seven times from its low point in January 2016. We had underestimated how good their earnings could be.”
Next Mawhinney gave an example of a stock that had been difficult to time – Woodside Petroleum Limited. “On reflection we were too early with our investment in this stock. We had seen a big increase in rig count and the stock looked relatively cheap. We invested, but the share price fell. We bought more during the downturn, so investors benefitted from dollar cost averaging, but investors would have done even better if we had waited for the headwind to hit. We believe that the stock is still an extraordinary opportunity. However, the market doesn’t think so, and only time will tell.”
Mawhinney then changed gears to discuss one of the Allan Gray Australia Equity Fund’s recent successes: Sirtex Medical Limited. “While the stock has been volatile, it has delivered good value to investors over the time we held it. But if we stopped time on the day of the drug trial release, you would say that we made a mistake. But you would only say that if you knew what the trials would show.”
“If the trials had been successful, we would have been wrong not to be in Sirtex, as the stock would likely have tripled. We believed Sirtex’s potential rewards outweigh the risks and buying more when the bad trial results came out has to date been good for our investors.”
