Why does seeing things differently matter to us at Allan Gray?
Take a moment to consider the most profound developments in history – the aeroplane, the car, the telephone. Those who were responsible for these innovations all shared common traits. They were curious, analysed things with great discipline and paid attention to every detail. Emotionally, they had the courage, conviction, and discipline to follow through on their ideas and the potential they saw – even if it was in the face of short-term ‘failures’ and public ridicule. The Wright brothers saw things differently. They believed (against popular wisdom of the day) that it was possible for man to fly. Like the Wright Brothers, Alexander Graham Bell, Henry Ford, Thomas Edison and many others, we believe that by approaching things with a fresh perspective and in spite of short-term challenges, ones’ potential opportunities to grow and benefit over the long term are far greater and more profound.
Similarly, our approach to contrarian investing is about finding hidden opportunities
Contrarian investing, the approach that Allan Gray follows when deciding where and when to invest, is about seeing things differently to find currently unpopular and overlooked investment opportunities. The ability to see things differently is the result of an investment approach formulated more than 40 years ago and like most things still being perfected today.
Our approach to investing is based on three key elements:
- A performance based culture. This allows individuals to excel and encourages an ethos that is focused on aligning our interests with those of our clients. We believe that individuals make better decisions than teams or committees.
- An investment philosophy with a single objective. This is to buy shares at a discount to their underlying value with a margin of safety. This philosophy is enduring in nature, repeatable and scalable so that our clients may benefit from it long into the future.
- A clearly defined investment process. This has a single-minded focus on analysing and understanding the companies in which we may consider investing.
To execute this approach in a consistent and disciplined way, we have developed some important business principles over the years. We will not compromise on these because time and our track record has shown that they enhance our capacity to find hidden opportunities.
- A preference to attract and employ people in the investment team with limited or no previous investment experience. Training someone with no preconceived investment ideas is easier and less time consuming than retraining a seasoned professional to adopt our contrarian approach.
- A keen awareness of the danger of macroeconomic forecasts. It is very hard to cut the daily noise from the research process and when macroeconomic variables are introduced it simply serves to complicate decision-making. As a result, we prefer to focus on understanding business fundamentals, which we find much more useful and reliable than employing economists.
- We do our own research. It is impossible to find hidden opportunities if you use the research that others use to inform their views.
- We choose to do a few things and do them really well. We maintain a very narrow product range that ensures that we focus on making great investment decisions rather than business considerations like asset accumulation.
- We only offer products with performance-based fees, which aligns our success with that of our clients.
In order to find hidden opportunities you have to behave differently to others because we continue to believe that you can’t do what everyone else does and expect to do better. With investing this is easy to say, but incredibly difficult to do. This is why our business structure is deliberate and sets out to enable us to stick to our investment approach and these business principles.
Seeing things differently and taking advantage of this is at the heart of contrarian investing
Most investors are afraid of unpredictability and uncertainty, and are drawn to more ‘obvious’ investments where everything tends to ‘look great’. In contrast, we recognise the great opportunities that uncertainty can present, and seek to take advantage of these. We will continue to challenge conventional thinking, see things differently and have views that may not be particularly obvious or popular right now. Staying true to our fundamental, long-term and contrarian approach, we challenge what others see as certain, and embrace the opportunities created by uncertainty.
Your style and proposition strikes a cord with me. Can you pls provide evidence of how this has reflected in performance- particularly when the tracking error is most pronounced.
Thanks
Hi Dan.
Thanks for your question regarding how our style of investing has been reflected in performance. The simplest way to answer this is by reference to the performance track record of this strategy. As always with historical track records, one should be wary of making inferences about future performance. However, at least where the track record is long (say more than 10 years) and across a number of cycles, there may be some information to draw from that. We have applied the same contrarian approach in various markets over 40 years. Our longest track records are in South African equities (41 years) and global equities (25 years). In South Africa, the South African Equity strategy has outperformed the benchmark FTSE/JSE All Share Index by 9.2% per annum over 41 years. Meanwhile, the Global Equity strategy has outperformed the MSCI World Index by 8.3% per annum over 25 years. Both have been achieved with significantly higher than average tracking error. If you would like to discuss in more detail, please feel free to give us a call on 02 8224 8600 or via email [email protected]