LOOKING PAST THE PITCH - JULIAN MORRISON HEAD OF RESEARCH RELATIONSHIPS & NATIONAL KEY ACCOUNTS MARCH 2021 - FSITV
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LOOKING PAST THE PITCH
Julian Morrison
Head of Research Relationships
& National Key Accounts
March 2021
AGENDA
Why manager Look past the ‘pitch’ for a Current perspectives
selection is difficult sustainable advantage
2
THE LOW COST OPTION
URGENT SALE, 6 CD STACKER, SUBWOOFER LEAD
SYSTEM, MAGS
Tyres replaced 5 months ago, motor still
runs and is driveable but needs work needs
work or good for parts or new project, need
gone asap, pickup Pakenham, no reg or rwc,
last reg 2/2/17.
$500 o.n.o will not go under $400
Source: Verbatim from Gum tree add
3
THE CAR BUYER’S DILEMMA
250,000
200,000
150,000
Price $
100,000
50,000
-
Hyundai Excel (1993) Toyota Corolla (2020) Porsche 911 (2020)
4
THE INVESTOR’S DILEMMA…
(IF FUND MANAGERS WERE CARS)
250,000
200,000
150,000
Price $
100,000
50,000
-
Hyundai Excel (1993) Toyota Corolla (2020) Porsche 911 (2020)
5
IS ALPHA ACHIEVABLE? IS IT WORTH IT?
Manager Alpha (LHS) Manager Fees (RHS)
15% 1.2%
10% 1.0%
5%
0.8%
0%
0.6%
-5%
0.4%
-10%
-15% 0.2%
-20% 0.0%
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115
Number of Managers
6
“Eagles soar, but weasels don’t
get sucked into jet engines”
Steven Wright
7
BUT EVEN MODERATE OUTPERFORMANCE CAN MAKE A BIG DIFFERENCE
Annualised outperformance End balance Multiple of end balance vs index
Index return* $627,377
1% $872,112 1.4x (or $244,736 more)
3% $1,670,691 2.7x (or $1,043,314 more)
5% $3,164,791 5.0x (or $2,537,414 more)
Source: Morningstar and Allan Gray Australia as at 30 Sept 2019. *All Ordinaries TR Index return of 11.84% p.a. for 37 years to Sep 2019.
8WHAT AN ACTIVE MANAGER SHOULD BE
Distinct
Transparent
Sustainable advantage
Difficult to replicate
94 KEY INDICATORS OF A SUSTAINABLE ADVANTAGE
Alignment of Avoid Willing to oppose
Long-term business
interest a key overconfidence and consensus
owner mindset
principle accept uncertainty
10ALIGNMENT OF INTEREST A KEY PRINCIPLE 11
ALIGNMENT OF INTEREST
Q: Where is the Good Samaritan? A: Too much career risk
Source: Photo CC by Oiluj Samall Zeid
12CAREER RISK ‘The central truth of the investment business is that investment
behavior is driven by career risk. In the professional investment
business we are all agents, managing other peoples’ money. The
prime directive, as Keynes knew so well, is first and last to keep
your job. To do this, he explained that you must never, ever be
wrong on your own. To prevent this calamity, professional
investors pay ruthless attention to what other investors in
general are doing. The great majority ‘go with the flow’, either
completely or partially. This creates herding, or momentum,
which drives prices far above or far below fair price. There are
many other inefficiencies in market pricing, but this is by far the
largest.’
Jeremy Grantham, GMO
13
Source: GMO Quarterly Letter April 2012CAREER RISK If you were a fund manager, would you prefer…. a. 80% chance of double bonus and 20% chance of zero bonus b. Guaranteed average bonus Leads fundamental managers to make non-fundamental decisions (e.g. ‘this company is 10% of index – having zero exposure is too risky’) 14
WHOSE INTERESTS ARE BEING LOOKED AFTER?
Average weight of share – 5 largest active managers
Weight of share in ASX300 Index
Source: Morningstar and Allan Gray Australia as at 31 January 2021. 5 largest active managers as determined by Morningstar.
15WHAT DRIVES ALIGNMENT OF INTERESTS FOR A FUND MANAGER?
Ownership Performance
structure fees
Activism
Co-investment
(protect shareholder interests)
16AVOID OVERCONFIDENCE, ACCEPT
UNCERTAINTY
17MACRO FORECASTS AND THE DANGERS OF OVERCONFIDENCE
In 1999 just before the dot-com bubble burst, 3 books
In 1929 just before the Great Crash, respected
were published by 3 highly credentialled economic advisers
economist Irving Fisher said “Stock prices have
predicting that stocks would rise to record highs:
reached what looks like a permanently high plateau”.
“Dow 36,000” “Dow 40,000” “Dow 100,000”
Dow Jones Industrial Index 1929 – 1954 Dow Jones Industrial Index 1996 – 2012
Source: Bloomberg, Professor Irving Fisher, Economist, October 1929. Quotes, J.Glassman, K.Hassett and C.Kadlec.
18THE RETURNS TO PERFECT FORESIGHT
Value of $10,000 Invested in October 1982 for 37 Years
$10,615,573
$627,377
Hero Advice Portfolio ASX All Ords
Source: Morningstar and Allan Gray Australia. ASX All Ordinaries Index and hypothetical hero adviser portfolio performance. Data to 30 Sept 2019. Hero Advice Portfolio is a hypothetical
portfolio where the adviser/investor correctly predicts & invests in the best performing Australian Equity managed fund over non-overlapping 5 year periods over 35+ years.
19THE RETURNS TO PERFECT FORESIGHT
Growth of $10,000 Invested in October 1982
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
1982 1987 1992 1997 2002 2007 2012 2017
Hero Advice Portfolio ASX All Ords
Source: Morningstar and Allan Gray Australia. ASX All Ordinaries Index and hypothetical hero adviser portfolio performance. Data to 30 Sept 2019.
20FIVE WORST 12 MONTHS UNDERPEFORMANCE
Date Underperformance
Aug 1986 - Jul 1987 -18.4%
May 2007 - April 2008 -15.8%
Feb 2005 - Jan 2006 -13.9%
Dec 1988 - Nov 1989 -12.6%
Feb 2016 - Jan 2017 -9.4%
Source: Morningstar and Allan Gray Australia. ASX All Ordinaries Index and hypothetical hero adviser portfolio performance.
21SOME CONFRONTING STATS
200
Largest relative
180
underperformance at
39%
160 Zero net
outperformance
140 for more than 4
years
120
100
Worst drawdown point
80
Hero Advice Portfolio S&P/ASX 300
Source: Morningstar and Allan Gray Australia. ASX All Ordinaries Index and hypothetical hero adviser portfolio performance. Data December 2004 to 30 Apr 2009. TR Index’ to S&P/ASX 300’.
22WILLINGNESS TO OPPOSE CONSENSUS 23
IN ENGINEERING…
Source: Shutterstock.
24…BUT IN INVESTING 25
SENTIMENT, PRICE AND RISK MOVE IN SAME DIRECTION
Price
Time
Source: Allan Gray Australia
26CONTRARIAN INVESTING – A RISK AVERSE APPROACH
50 Oct 2010: “Newcrest has beaten its production 9000000
forecasts for the first time in nine years, which shows
45 the business is improving.” 8000000
- The Australian
40
7000000
35
6000000
30
Price AUD
5000000
Holdings
25
4000000
20
3000000
15
2000000
10
Aug 2013: “5.8bn loss
5 rocks Newcrest” 1000000
- The Australian
0 0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Allan Gray Australia Equity Fund Holdings Newcrest Price AUD
Source: Allan Gray as at 31 January 2021.
27INTRODUCING
ALLAN GRAY
48 YEARS OF
DOING THINGS
DIFFERENTLY
282006
Australia Equity
Fund launched
1973 1989 2005 2018 2021
Established in South The Orbis Group is Allan Gray Australia 2011 Allan Gray Australia 16 years in
Africa in 1973 formed in Bermuda began operating in Australia Stable Solutions launched Australia
Sydney and applied Fund launched
for its AFSL
2017
Australia Balanced
Fund launched
29INVESTMENT PHILOSOPHY
Value
Time
30HUGE DISPERSION IN SECTOR VALUATION – PRESENTS OPPORTUNITY
80 20
Forward P/E ratio AGA relative weight
60 15
40 10
20 5
AGA relative
weight (%)
Australia Equity
Forward P/E ratio 0 0
Fund
-20 -5
-40 -10
-60 -15
Information Healthcare Communication Utilities Industrials Consumer Consumer Real Estate Energy Financials Materials
Tech Services Discretionary Staples
Source: Factset, Allan Gray 31 December 2020
31SUMMARY
Manager selection can be made easier
Look for an approach that emphasises….
Alignment of interests
Business owner mentality to investment
Avoiding overconfidence and acceptance of uncertainty
Latitude and willingness to oppose consensus
32 White paper available at allangray.com.auCONNECT WITH US 33
About this presentation
Objective of To provide you with some key high level information about Allan Gray and Orbis, their investment philosophy and the following Funds:
presentation (i) the Allan Gray Australia Equity Fund, the Allan Gray Australia Balanced Fund and the Allan Gray Australia Stable Fund (Allan Gray Funds); and
(ii) the Orbis Global Equity Fund (Australia Registered) (Orbis Fund or Global Equity Fund).
Please don’t take this presentation as an offer to sell or a recommendation that you should invest in any Fund. Before making an investment decision, please read the relevant
Fund’s Product Disclosure Statement and Information Booklet (together PDS). The PDS is available from www.allangray.com.au or www.orbis.com free of charge.
Issuer of units Equity Trustees Limited, AFSL No. 240975
Investment Manager Allan Gray Funds: Allan Gray Australia Pty Ltd, AFSL No. 298487
Orbis Fund: Orbis Investment Management Limited; Australian Distributor: Orbis Investment Advisory Pty Limited, AFSL No. 237862
Orbis Global Strategy The Orbis Global Equity Strategy represents combined returns of all Orbis funds following the same global investment objective. The strategy information has been used to
and Global Equity Fund demonstrate Orbis’ contrarian investment philosophy. The Global Equity Fund is Orbis’ Australian domiciled fund that employs the same investment objective as the strategy.
Australian retail investors who are interested in the Global Equity Strategy must invest in the Australian domiciled fund.
No personal advice This presentation only provides general information or advice. It does not take into account any investor’s personal financial circumstances, objectives or needs. Please read
Allan Gray’s or Orbis’ Financial Services Guide if you are interested in the benefits either entity is entitled to receive as an AFS licensee. The FSG is available from their
respective websites.
Risks There are risks with any investment, including one in the Funds. Please read the risk section of the relevant PDS for more details.
Performance Past performance is not a reliable indicator of future performance and the value of any investment in the Funds is not guaranteed. The net returns for the Orbis Global Equity
information Strategy, is illustrative and based on returns of the strategy after applying the Retail Class Fee of the Orbis Global Equity Fund based in Australia.
Economic, market, index Such information is provided to indicate reasons for our investment decisions or represents our views on certain matters and based on certain assumptions and proprietary
or stock commentary analysis. It is not intended to be personal financial advice. You should not rely on our commentary to make any investment decision. This is because our views can and do
change over time, or may turn out to be incorrect.
Other Finally, please seek professional advice, if necessary. We have tried to ensure the information in this presentation is accurate in all material respects but cannot provide any
guarantee that it is.
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