Interview with Dan Abeshouse by Richard Holdcroft
Everyone knows that risk makes investors uncomfortable, but ironically some financial experts warn that a sense of comfort is precisely what investors should be seeking to avoid.
Allan Gray Australia portfolio manager Dan Abeshouse says investors are often most at risk just when they feel safest.
“We tend to feel more comfortable investing in a stock when its recent performance has been strong, when everyone around us is investing in it or when it is a familiar household name,’’ says Abeshouse.
“People naturally gravitate to these so-called safer bets, but they can lull us into a false sense of security.
“Even the best company – that is well managed, with a good balance sheet – is a poor investment if you pay too much and there is limited potential for returns.’’
Since the GFC there has been an increased focus on buying quality companies, but cost also matters, says Abeshouse.
Wherever there is a perception of security, he cautions it is essential to look below the surface to see what hidden risk you may be exposed to. The ‘safest’ and most popular options can be a trap if you overpay for them.
Their portfolio managers operate on the principle that you cannot do what everyone else is doing and expect better results.
Allan Gray’s track record extends over the 40 years they have been operating in South Africa and the 10 years they have managed an Australian equities fund.
It is a fundamental tenet of contrarian investing that when everyone is bagging a sector or a stock it could be time to consider investing, because the risk may already be written into the price.
Abeshouse cites Australian healthcare and infrastructure as examples of sectors where investors currently have a rosy view of the future, and the good returns they anticipate rely on everything going well.
“As contrarians we look instead for cyclically depressed targets,’’ he says.
“Good examples at the moment would be energy and commodity-exposed companies, where there are some compelling opportunities in pockets of the sectors.
“For instance, our Equity Fund is invested in (gas and oil plays) Origin Energy and Woodside Petroleum. Both have long-life assets that will continue to produce many years into the future.
“Alumina Limited (a bauxite miner, refiner and aluminium smelter) has been another attractive proposition with long-life assets and a conservative balance sheet that can wait out cyclically depressed phase of cycle.
“Gyrations in commodity prices are not as important as average prices over a long period, and investors will eventually be rewarded when prices stabilise.’’
Allan Gray adopts a minimum investment horizon of five years, and looks beyond the short-term fluctuations of markets. While returns may vary from year to year, the Allan Gray Australia Equity Fund has outperformed its benchmark over the long term.
This investment approach can be difficult to implement as it requires the courage of conviction to risk going against the herd, and the fortitude to accept a degree of discomfort.
But as Allan Gray has shown, in return it can deliver the ability to outperform the market in a long-term, sustainable fashion.