Interview with Simon Mawhinney by Lachlan Colquhoun
The short-term thinking which drives sharemarket valuations can create significant opportunities for the long-term investor.
Short-termism can lead to significant mispricings by the market, which often ignores companies’ intrinsic value because they are in unfashionable sectors of the economy and are marked down as a result.
Investment firm Allan Gray sees this mispricing as an opportunity to buy shares cheaply and sell shares at what it considers fair or inflated levels. In turn, they look to deliver growth in the long term.
Portfolio manager Simon Mawhinney is unmoved by short-term fluctuations, unless it presents positive buying opportunities or opportunities to exit investments at inflated levels.
He says he works to a three- to five-year time frame, and focuses on buying companies he believes are between 30 to 50 percent undervalued by the market.
“These kinds of stocks are not widespread but they are definitely out there,” says Mawhinney.
“Our approach is to buy stocks which are significantly lower than our assessment of intrinsic value, and this allows us the time for the thesis to play out over a longer period of time.
“These are companies that are often undervalued because of either company-specific or industry-specific bad news associated with the company. For example, companies that have been part of a long and protracted cyclical downturn, where investors have given up on them. When the cycle turns, the upside can be significant.”
By examining those companies at the bottom of the cycle, and better understanding their quality and potential, the portfolio managers at Allan Gray can identify stocks which they believe have been mispriced, and will ultimately rebound strongly.
Unlike many other investors in the current market, Simon Mawhinney does not focus only on dividend yields when purchasing a company.
“A sole focus on dividends is the flavour of the times in our low-interest environment, but our focus is on total returns. Capital gains are a very large part of that,” he says.
Mawhinney maintains a portfolio of up to around 50 stocks in the Allan Gray Australia Equity Fund and when he believes a stock has reached its intrinsic value, it is sold.
“It is easy to become wedded to a particular company that has done well for you in the past,” says Mawhinney.
“But we find that a dangerous approach and it is not the way we invest.
“Emotional attachments to the companies in which you invest is not a road to salvation.
“There will always be a time when the least attractive company in the portfolio needs to make way for one that is more attractive. But it is always valuation that drives this decision.”
One example of an attractive company is gold miner Newcrest.
In 2013 gold prices fell significantly to prices that were arguably unsustainable. The Newcrest share price followed suit.
“We looked at Newcrest then and decided that it made a lot of sense to buy it for the Fund,” says Mawhinney.
“We still hold our Newcrest shares, and it is at just under $20 now, and I think it will stay in our portfolio for the next three to four years.
“But when it reaches what we think is intrinsic value then yes we will sell it.”
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.