Orbis has launched a new global multi-asset fund – the Orbis Global Balanced Fund. The Fund has been registered for marketing in South Africa and is now available via the Allan Gray offshore platform. Alec Cutler discusses the rationale behind the launch and explains how the Fund aims to deliver on its mandate.
At the inception of the Orbis Funds in 1990, the firm provided clients with both a long-only Global Equity Fund and two Absolute Return options, which substantially hedge their stock market exposures. This allowed clients to blend these building blocks to suit their own risk tolerance and portfolio needs, particularly regarding the level of equity exposure. Since 1990, Orbis has added to its range of strategies in response to long-term investment opportunities.
Over the past few years, clients have called for an offering where asset classes are blended to provide long-term capital appreciation, but with less volatility and risk of loss than Orbis' long-only Equity Funds. In studying the best way to accomplish this, Orbis sought to design a fund that could produce the desired balance of risk and reward for the very long term. Their analysis concluded that a balanced strategy best fits the bill, with the ability to vary exposure across asset classes.
Enter Orbis Global Balanced
In 2013, Orbis launched the Global Balanced strategy. Its mission is to balance appreciation of capital and income generation with the risk of capital loss. In addition to the flexibility to invest in the asset classes described in Table 1, it can also adjust its equity and currency exposures using hedging.
As with all Orbis funds, the positioning of Global Balanced – including the percentage of the portfolio that is allocated across the various asset classes – is driven from the bottom up, drawing on Orbis' fundamental research process and capital allocation capabilities.
While Orbis Global Balanced seeks to deliver more stable returns than Orbis Global Equity, capital appreciation is a core aim of both strategies. Importantly, reducing volatility at the portfolio level does not mean forgoing individually attractive investment opportunities – even ones that may appear more 'risky' in isolation. The portfolio is therefore likely to include many of the same shares that Orbis analysts recommend for the Global Equity strategy. But, importantly, Orbis Global Balanced also has the latitude to invest in higher-yielding and more stable shares if they appear to offer a more appropriate balance of risk and reward. A good example is the Fund's holdings in Korea, as shown in Graph 1.
In line with the investment approach, there is significant overlap between the Korean holdings in each Fund. While Orbis Global Equity holds higher weights in Samsung Electronics and KB Financial, which are more economically sensitive, Orbis Global Balanced also has significant positions in these shares. The Fund's approach to yield is similar. While Orbis Global Balanced holds a bigger weight in the high-yielding SK Telecom, it also holds Korea Electric Power, which offers a negligible dividend today but attractive upside potential and the capability to meaningfully increase pay-outs in the future. By applying this approach across regions and sectors, Orbis Global Balanced aims to produce an equity portfolio with a higher yield and lower market sensitivity than Orbis Global Equity – without 'sacrificing' too much in the way of returns.
Leveraging company research to find attractive bonds
When Orbis first launched Global Balanced, the fixed income asset class had enjoyed a multi-decade bull market. Understandably, Orbis was not enthralled with the near-term potential of bonds as an asset class, and started with the minimum 10% target allocation to fixed income, with most of that in cash or short-term corporate bonds. While bonds performed poorly in 2013, Orbis continued to find better alternatives in the form of higher yielding and strongly cash generative equities, as well as in more cyclical shares whose contribution to the portfolio's risk can be reduced with stock market hedging.
ORBIS SOUGHT TO DESIGN A FUND THAT COULD PRODUCE THE DESIRED BALANCE OF RISK AND REWARD FOR THE VERY LONG TERM
That said, Orbis has found selected bonds that it is happy for the Fund to hold. To date, it has held short-term bonds from the likes of Vodafone at one end of the maturity schedule, and Thomas Cook and Alcoa bonds further out. If one recognises these names from the equity portfolios of Global Balanced or other Orbis Funds, it is no coincidence. Orbis uses the same fundamental research process that has proved capable of uncovering undervalued equities to uncover securities in other parts of a company's capital structure. Orbis has found that if the market is overly pessimistic about a company's prospects, that pessimism is typically not limited to the company's shares, but extends to its preferred shares and fixed income issues. With Orbis Global Balanced's broader mandate, Orbis has the ability to consider and purchase these securities.
An example of this approach is the Fund's holdings in the aluminium industry. In the past year, Orbis company analysts have found aluminium producers Alcoa and Norsk Hydro attractively valued, as sentiment on the industry was poor but its supply/demand balance was starting to improve. In comparing the companies' equity, Norway-based Norsk Hydro's 2.5% dividend yield, relatively solid balance sheet, and conservative management team appeared more appropriate for Orbis Global Balanced, while the greater uncertainty – and potential upside – of Alcoa's equity made it more appropriate for Orbis Global Equity. As for the companies' debt, Norsk Hydro's fiscal conservatism was reflected in relatively unremarkable yields. But Alcoa's bonds looked interesting. Moody's had downgraded Alcoa's credit rating, and as Orbis analysts compared the reasons for the downgrade against the company's fundamentals, they gained conviction that the reduced rating would likely prove temporary. Accordingly, Orbis Global Balanced bought a significant position in Alcoa's 2037 bond.
Will the Fund deliver on its mandate?
With this flexible approach, Orbis believes Global Balanced can deliver on its mandate over the very long term. And while six quarters do not a track record make, the Fund's performance so far has been encouraging. Some readers will recognise Graph 2 as an 'efficient frontier', which compares the return generated by a portfolio with the volatility of its returns. Higher and to the left is better. As you can see, Orbis Global Balanced has thus far generated a higher return than its benchmark, without much more volatility. Early indications are that it is doing its job within the Orbis Fund family, with returns and volatility sitting in the middle of Global Equity and Optimal Funds.
Of course, as with any fund, there are environments in which Orbis Global Balanced may look stupid. With its current low weighting in bonds and hedged exposure to US equities, the Fund could perform poorly if US equities strongly outperform, or if bonds resume their multi-decade bull market. Performance may also suffer if momentum darling stocks emerge and the bull market narrows into a small group of 'chosen few' stocks. On the other hand, with large weightings in selected European and Asian shares, Orbis Global Balanced may perform well if those markets outperform. With its substantial exposure to equities, the Fund may also do well if economic activity continues to accelerate.
While the macroeconomic environment may drive relative performance over the short term, Orbis is confident that the Fund's long-term success will be determined by their core skill: finding attractively-priced individual securities.