Interview with Julian Morrison by Richard Holdcroft
The challenges facing investors can be intimidating. Where information once trickled out quarter by quarter, modern communications technology means that the sheer amount of information available to investors can be impossible to adequately scrutinise.
When good information about a product does emerge from that morass, surges in a company’s popularity can make shares vulnerable to distorting influences, such as overvaluation, rumour, misinformation and other forces that can make investment a volatile business.
In such a market, experience, wisdom and creative thinking come at a premium.
Allan Gray, a fiercely independent active fund manager, is well placed to offer the expertise needed to navigate a crowded and uncertain market.
Globally since 1973 and in Australia since 2005 it has been helping investors build wealth using a contrarian, long-term investment philosophy.
National key account manager Julian Morrison explains the three pillars to their established investment strategy:
1. Independent thinking
As contrarian investors, Allan Gray prefer to focus their research on unpopular shares.
“When you decide to buy a popular share, you are effectively standing at the back of a very long queue,’’ says Julian.
“To get to the front of the queue, you have to outbid everyone else, and you run the risk of paying too much.’’
The herd mentality can be an investor’s worst enemy, he says. Perhaps counterintuitively, this is why contrarian investing is a risk-mitigating strategy; by reducing the competition when buying, you minimise your risk of overpaying.
“Whenever something is popular, be it shares, property or whatever, there is the fear of missing out, a sense of urgency or pressure, and investors become irrational and tend to make mistakes,’’ says Julian.
He says it is important to buy stocks with a margin of safety built into the price.
“The true value of a share can never be precisely established,’’ he says.
“But you can estimate a value range, and then by ensuring you pay a price below the bottom of that range you get a margin of safety which allows room for error.
“We look for unpopular shares at low prices that offer good, long-term value. The most popular shares are priced for a fantastic outcome. If the future turns out anything less than fantastic, you have overpaid. You can lose a lot of money that way, even if it’s a ‘good business’. On the other hand, if a share is priced for an abysmal outcome and the outcome is only moderately bad, or better still average, you can do very well out of it indeed.’’
2. Pay attention to business fundamentals
The ability to distinguish between price and value is essential.
“If you don’t have a strong basis upon which to base your valuation of a company (as opposed to its share price), then you have no idea whether you are over or underpaying,’’ says Julian.
“You need a strong understanding of the basic fundamentals driving the business, and these tend to reveal themselves over a full business cycle, which may be five years or even longer.’’
When buying a share, Allan Gray behave as though they were buying the whole company. A cornerstone of this approach to investing is a reliance on in-depth company analysis.
Allan Gray’s team place great emphasis on in-house research, and their fund managers will typically meet with the management of a company before making an investment decision.
3. Sound long-term planning
“One edge almost any investor can still use to their advantage, (precisely because so few do), is patience,’’ says Julian.
While profits and share prices will fluctuate from quarter to quarter, year to year, what really matters is that they will average out in the long term.
“It feels good to own what is currently popular, but to beat the market we need to be coldly logical and rational,’’ says Julian.
“We need the patience to wait until something is a bargain before buying. And then we need the patience to wait – for years if necessary – until the market reassesses the value and prices it more accurately, before selling.’’
Allan Gray’s typical holding period is four to five years. With no pressure to follow the herd, their fund managers are able to think strategically and invest patiently.
It is this investment philosophy that has enabled them to outperform the market over the long term, both in Australia and overseas.
Julian Morrison holds a Bachelor of Arts (Honours – University of Sheffield) and the Chartered Financial Analyst designation.