Freelance Journalist Zilla Efrat – Sydney Allan Gray Investment Forum Tuesday 8 November 2016
After a tough decade for most value managers, including Australian, contrarian manager Allan Gray, the tide seems to have turned and the future appears full of opportunities.
As its managing director and chief investment officer Simon Mawhinney explained at its Investment Forum in Sydney yesterday, the Australian stock market was looking expensive and the multiples on earnings being paid were quite high.
Added to this, he said extreme upward trending had gripped the Australian equities market since 2009, pushed by the momentum in a few sectors that were performing phenomenally well.
“These are sectors that have stable or growing earnings and in the face of extreme uncertainty, investors have flocked to them at the expense of stocks that are either cyclically exposed or going through some kind of headwinds, whatever they may be. The stocks that have done well are REITs, healthcare, utilities, infrastructure, financials until recently and companies exposed to the consumer in China.”
There is little value remaining in these stocks, but Mawhinney said Allan Gray had managed to identify pockets in the market where earnings were somewhat depressed and stocks were trading on low or reasonable multiples of earnings. These included resource, materials and energy stocks as well as some consumer discretionary and consumer staple companies.
He said the present level of trending was unprecedented and believed it was mathematically impossible for it to continue indefinitely. The situation would eventually reverse as it had done with the tech bubble in the late 1990s and the Global Financial Crisis in 2007, he said.
Mawhinney noted that after the tech bubble burst, the period of trending reversal lasted a long time – three or four years. During this time Allan Gray in South Africa, which follows a similar long-term contrarian fundamental investment strategy for international equities, managed to outperform its benchmark significantly.
“So the message is that as soon as you get trending to the level that existed pre-tech wreck or as you get now, the opportunity to outperform the index is huge and looking back in history, the unwinding of the cycle has taken many years.” said Mawhinney.
“We feel that we are one year into this cycle, but it’s possible we haven’t even begun the journey. Only time will tell how it will play out.”
In the year to the end of October, Allan Gray Australia Equity Fund Class A returned 29.5 per cent (net of all fees and expenses) and outperformed its benchmark (the S&P/ASX 300 Accumulation Index) by 23.2 per cent. While the Fund performance has fluctuated over its 10-year history, since launch it has returned 7.4 per cent per annum (outperforming the benchmark by 2.7 per cent).
The investment approach of the Fund, which has been investing in Australia for 10 years, is to buy shares that are currently ignored by the general investment community or are not well known, but which it expects to offer great long-term value.
Its top 10 holdings currently include Woodside Petroleum, Alumina, Newcrest Mining, Origin Energy, Metcash, AusNet Services, National Australia Bank, Sims Metal Management, Southern Cross Media Group and Worley Parsons.
Mawhinney said the Fund looked for companies which had good, long-life assets, strong balance sheets and peers which were bleeding and likely to die before the target companies did – for example, in sectors where commodity prices cut very deeply into the cost curve and a significant portion of world production was loss-making.
“Then you know that there’s blood on the streets and, at the least, you are going to get a decent deal,” he said.