Interview with Suhas Nayak by Zilla Efrat
Fund manager Allan Gray believes that good things come to those who wait.
That, it seems, is a rare view in an era of abundant short-termism where fund managers and companies are often mostly focused on the next set of numbers they need to report on.
Suhas Nayak, an investment analyst at Allan Gray Australia, says: “When things are going badly, company executives and boards are under an almost relentless pressure to be doing something to improve the situation, or to be seen to be doing something. Unfortunately, when they end up doing something – for example making an acquisition – they may pay too much or make hasty decisions.
“Sometimes the best decision is to do nothing, especially if you have done the homework and the likelihood is that you just have to wait for a favourable outcome or a more opportune time to take action.”
Fund managers are not immune to knee-jerk reactions either. They may shuffle their portfolios or buy or sell shares to counter fears after a short period of underperformance.
However, Nayak notes: “If fund managers chop and change too much, they will be starting from behind the eight ball because every chop and change results in a transaction cost. To recover those transaction costs from their future gains becomes increasingly difficult.
“Also, most companies’ fundamentals don’t change nearly as quickly as market sentiment does. So by chopping and changing, managers can miss out on seeing investment opportunities through, just because the short-term sentiment around that company has changed.”
Allan Gray is certainly patient. Research shows that the average holding period of fund managers has shortened dramatically to around a year. But for Allan Gray, the period from buying to selling a stock can take anywhere from three to five years.
Nayak explains: “The investments that do well for us are typically in companies where we start buying at a time when we think the price doesn’t reflect fundamental value. If the price falls further, we will re-examine if we are still comfortable with the fundamentals and will often buy more at that stage. If a stock starts to bottom and turn, we often stop buying and will wait until it comes back to fair value. And that’s when we start to sell it.
“You only do well by thinking a little differently to the rest of the market. So it would stand to reason that holding your stocks for a longer period and having patience, which few people have these days, could potentially be a competitive advantage.”
Nonetheless, being a value manager and sticking to this style during different market cycles can be challenging.
“You are often buying when everyone else is selling and that requires a certain level of conviction and fortitude,” says Nayak. “Often when you are buying, the stock will fall even further and test your ideas and hypotheses. You are usually going against the herd and that’s not comfortable for everyone. But the value style of investing does tend to do well over the long term because that level of discomfort you have buying against everyone can be precisely the source of excellent returns.”
Allan Gray’s portfolio is often filled with stocks that have been in the news for all the wrong reasons. Currently, it has large holdings in oil and gas, aluminium and gold shares.
“Resource companies have been really hurt over the past year to 18 months,” says Nayak.
“We’ve been investing in these stocks when many have been getting out of them, as we believe we will achieve returns if and when they turn around. We can’t predict when they will turn, but we are investing at a time when these shares are as cheap as they have been recently on a number of different measures.”
Suhas Nayak holds a Bachelor of Science (California Institute of Technology) and a Doctor of Philosophy in Mathematics (Stanford University).