Portfolio manager Mark Dunley-Owen reflects on the recent performance of the Orbis Optimal SA Fund, highlighting key contributors, detractors and why the team remains cautiously optimistic about the opportunities ahead.
Finding value in the unloved areas of the market
When we say “unloved”, the US biotechnology sector has been a clear example of what this means. After peaking during the COVID-19 pandemic period, many US pharmaceutical and biotech names sold off as investors grappled with policy uncertainty and political debate about the cost of care.
Such sell-offs can create attractive entry points. We bought a basket of biotech businesses with best-in-class medicines, deep scientific capabilities and high-calibre management teams. At the lows, these traded below a conservative assessment of the value of their probable cashflows, giving no credit for future successes. A number of these, namely Genmab, Alnylam Pharmaceuticals and Insmed, positively contributed to the Orbis Optimal SA Fund’s performance in 2025, and we believe they continue to offer a meaningful gap between price and value.
The defence industry was another area where prices and fundamentals diverged as defence stocks underreacted to a significant shift in the geopolitical and policy environment. The ongoing war in Ukraine, changing US priorities and rapid technological change have transformed defence companies from “running to stand still” to “running to catch up”. Their revenue, margins and returns have responded accordingly, as have their share prices. Holdings such as Leonardo, Mitsubishi Heavy Industries and BAE Systems were strong contributors. Price appreciation in these companies closed the discount to value, so we sold them and recycled capital into other opportunities.
Japanese property developer Mitsubishi Estate was one of the Fund’s larger contributors. The stock illustrates the kind of “simple but effective” thesis we like: irreplaceable premium properties, improving rental dynamics as Japan experiences inflation for the first time in decades, and a starting valuation materially below our estimate of net asset value. We found similar value across other Japanese businesses where operational improvements and better capital allocation are translating into higher returns for shareholders.
Beyond these themes, other idiosyncratic holdings contributed to stock-picking alpha. Barry Callebaut, the world’s leading manufacturer of chocolate and cocoa products, was overly penalised for higher cocoa prices, even though the resulting industry stress may ultimately strengthen its role in the supply chain. British American Tobacco’s next-generation nicotine products continue to gain traction, while investor attention remains fixed on the slow decline in cigarette volumes. Tesco’s scale and loyalty ecosystem are helping it outcompete supermarket peers, supporting resilient cashflows and shareholder returns.
A cautiously optimistic outlook
What did we get wrong? US health insurers Elevance Health and UnitedHealth Group did poorly. In 2025, their share prices reacted negatively to political noise, accusations of prioritising profit over patient care and poor management decisions. We trimmed our positions in response to initial concerns but did not exit, which hurt performance. We subsequently added at lower prices and remain confident that these businesses will continue compounding shareholder value.
US cyclicals also underperformed our expectations. Higher interest rates and stretched affordability have weighed on housing-related businesses. Economically sensitive areas like transport, packaging and discretionary consumption are in the depths of a downturn linked to weakness in the bottom part of the “K-shaped” US economy. While we cannot predict when it will turn, it reliably has in the past. Our focus is on finding companies where management is protecting and, ideally, increasing long-term value per share through the downturn. The Fund owns companies that fit this description, including Corpay, Fortune Brands Innovations, FirstService (a Canadian company with significant US revenue), RXO and Smurfit Westrock. We are excited about their future potential.
It would be remiss not to mention artificial intelligence (AI). The Fund has limited exposure to the headline beneficiaries but does own Taiwan Semiconductor Manufacturing Company (TSMC) and Nebius. TSMC needs little, if any, introduction. Netherlands-based Nebius was previously part of the Russian technology business Yandex, before selling its Russian assets, severing all ties with the country and developing into an international AI-focused cloud infrastructure business. Its CEO and chairman were both involved with Yandex’s founding and have strong track records of building successful businesses. Our respect for the Nebius team helped us appreciate its potential before it was recognised by the market.
It would also be remiss not to mention China. The Fund’s Greater China exposure is concentrated in world-class businesses trading at large discounts to value. Some, such as NetEase and Jardine Matheson, performed well as earnings exceeded expectations following value-enhancing management actions. Others, such as ANTA Sports, have been disappointing. We remain cognisant of the risks within China but believe these are offset by the value within our holdings and the Fund’s ability to hedge out regional currency and market risk.
Looking ahead, we are optimistic – not because we expect calm markets, but because volatility often creates opportunity. We continue to find businesses where we believe price and value are meaningfully misaligned. If these perform as we expect, the Fund should continue to generate pleasing absolute returns with low correlation to broad market movements.
The Fund’s overall net equity exposure rose over the quarter. Among individual positions, we initiated a position in a US-based chemicals producer and trimmed Nebius following a period of share price strength.