As contrarian investors who invest differently, periods of underperformance are part of the investment cycle and, while disappointing, they can offer opportunities. Being patient through these cycles is difficult and we know this places pressure on you, our clients. However, often we find the point at which it is most uncomfortable is also when our investment approach can be the most rewarding.
In this article, we look back at previous challenging periods Orbis has faced and share our views about where we are finding value in the current environment.
Orbis has been through challenging periods before
The Orbis Global Equity Fund has outperformed its benchmark since its inception in 1990 by around 4% per year after fees. This means that over a 30-year period had you invested your money in Orbis it would be worth three times as much versus placing it in the benchmark. However, the returns have not been delivered in a straight line. In fact, there have been eight previous periods in the Fund’s history where we underperformed the benchmark by more than 10%.
What may be of particular interest, though, is that in each of these challenging periods, Orbis has recovered in the years which have followed. For our clients who held the same patient and long-term view as us, the subsequent relative performance after these periods of underperformance proved to be worth the wait.
Where do we find value in the current environment?
Over very long periods, buying cheap “value” stocks has been a winning strategy. Many of these stocks could be cheap for a reason – perhaps they are riskier, have poorer growth prospects or earn less profits – but investors take these differences between companies too far too often. An exciting, fast-growing company can look like a good investment at any price as investors believe the growth is infinite. On the other hand, companies which are struggling may look as though they are uninvestable, as investors believe that today’s struggles will last forever. In our view, this is a mistake, and the reason that value investing works over the long term.
To be clear, we don’t just simply buy the cheaper “value” stocks. We conduct in-depth company research, aiming to buy businesses below our assessment of their intrinsic value. Often these companies have superior growth prospects which are underappreciated, or they are going through temporary difficulties. Our focus on the fundamentals and the longer term, however, does lend a pattern to our performance. Our approach tends to produce better results when cheap stocks are getting less cheap, and has a tougher time of it when expensive stocks are getting more expensive.
Unsurprisingly, we have seen more of the latter: expensive stocks getting more expensive. This environment has been unusually challenging for contrarian investors since the Global Financial Crisis. As central banks in most developed countries cut interest rates to very low levels, bond investors also entered the stock market in search of bond-like stocks. Shares which are typically considered “safer”, such as defensives, are also now overvalued and expensive compared to other opportunities, in our view. For example, Coca Cola outperformed world markets in 2018, despite earnings and revenue failing to grow since 2010. In addition, the popular large technology stocks, such as Apple and Netflix, have driven the US market to near all-time highs. We have therefore decided to invest elsewhere, where we think we can find better value. Remember, it is the companies we own, as well as the companies we don’t own, that contribute to performance. Avoiding expensive stocks can be costly over the short term but rewarding over time.
This approach may be frustrating as our performance suffers, but the silver lining is that the stocks where we have found value are even cheaper today. Therefore you should not be surprised that through this period, we’ve been adding to the companies that appear unfavourable, relying on our fundamental research to fight human nature and buy when others think we’re foolish. For example, AbbVie, a large biopharmaceutical company, was deeply out of favour through much of 2018, yet the company continues to have strong business fundamentals and an attractive future pipeline of drugs that are not reflected in the current price. In our view, the Orbis Funds today contain an above-average collection of companies trading at above average discounts to their intrinsic values – to us that’s cause for enthusiasm.
Contrarian through and through
As contrarian investors, we invest differently, which means that our Funds’ performance can also differ significantly from the benchmark. At times like this, it is as important as ever that we continue to apply our fundamental and long-term investment philosophy as we have always done. We can’t predict when expensive stocks will stop getting more expensive, or when our performance will turn, but we are determined to stick to our disciplined investment approach. We remain convinced that buying quality on the cheap, and passing on what’s highly valued by others, remains a winning formula over the long term. We hope that you can also share in our conviction.