Offshore investing - Allan Gray
Offshore investing

Orbis: President's letter 2020

In his annual president’s letter, William Gray, from our offshore partner, Orbis, reflects on a difficult year and reaffirms his conviction in the team’s ability to add value for clients.

Our purpose at Orbis is to empower our clients by enhancing their savings and wealth. We are convinced that if we focus on earning and retaining the trust and confidence of our clients by adding value through our investment decisions and aligning our interests with theirs, we can translate our passion for investing into making a meaningful difference for our clients, ourselves and our communities over the long term. By design, we are also careful to ensure that our interests are similarly aligned at times when we fail to deliver on our aspirations.

2020 was another such occasion. On an asset-weighted basis, blending net-of-fee returns across share classes, the Orbis funds returned 12.7% in 2020 versus 15.0% for their benchmarks. We personally share these tough times with you, as substantial co-investors in the funds, through very low firm profitability/small losses due to our performance-based fee structures, and through lower individual remuneration – and that’s exactly how it should be.

Falling short of our objective is not unusual, and at times it can last for an extended period. In fact, it’s not just normal – it’s necessary. Investment approaches swing in and out of favour. Any approach that makes sense and works long enough will inevitably become so popular and pervasive that it will stop working long enough to convince many investors that it will never work again. 

It’s a pattern that we have seen before. Value-oriented investing worked spectacularly well for decades – until it stopped working in the late 1990s and even put some of its best practitioners out of business. The approach came roaring back into fashion in the wake of the dotcom bust, yet now finds itself being similarly tested once again.

paying substantially less for an asset than it is worth is a timeless recipe for investment success – even if it means waiting an uncomfortably long time

We aren’t smart enough to predict the timing or duration of these changes, but we do know that they have been cyclical in the past. The familiar saying that “past performance is no guarantee of future returns” isn’t just legalese – it is a wise and time-tested warning that the market’s favourite stocks can and often do fall out of favour. But paying substantially less for an asset than it is worth is a timeless recipe for investment success – even if it means waiting an uncomfortably long time. The best thing we can do is to ensure that we build a sustainable firm with an aligned client base that can live to fight another day and be prepared to take advantage when the opportunities present themselves. 

In thinking about investing, an analogy I’ve used before is playing a “loser’s game”, which comes from the work of Dr Simon Ramo, an engineer who studied amateur tennis players and wrote a popular book on the subject in the 1970s. Ramo found that approximately 80% of points are decided by mistakes rather than skilled shot-making. I think of investing the same way. Rather than relying on a “winner’s game” consisting of spectacular streaks of brilliance, a better approach is to contain mistakes and invest with controlled conviction. While it may not be the most fun to play, it is a winning strategy for those who have the discipline, patience and humility to stick with it. This also explains why the “loser’s game” of low-cost index-based investing beats most active managers over the long term, particularly those with the additional headwind of excessive “heads we win, tails you lose” fee structures. 

Interestingly, however, it is now the passive approach that suddenly finds itself playing the winner’s game. In recent years, benchmark indices have become abnormally concentrated in a relatively small number of big winners, many of which have online and network-based “winner takes most” business models that are almost tailor-made for a world forced to stay at home. These companies delivered unusually strong fundamental performance in 2020 and investors have been unsurprisingly enthusiastic about their prospects. 

As always, we don’t know how long it will continue and we can make no promises about the future, but it looks increasingly likely to us that an end to this trend is within sight. 

The improvement in our investment performance over the last two months of 2020, coincident with news of several effective COVID-19 vaccines, is encouraging in that regard. Even so, the extent of that move barely registers as a blip on a longer-term chart. It is exciting to think what might be possible if current valuation gaps begin to close in earnest. Personally, I find it an even more compelling indicator that our investment professionals within Orbis are expressing ever greater conviction in the future opportunity for added value – more than I have seen in years, with the possible exception of March of last year. 

I thought it might be interesting to share some of the team commitments that we make to each other for our Global Strategy Meetings to ensure that we remain grounded and prepared for the opportunities in front of us:  

As a colleague said recently, what defines a winning team is how they conduct themselves when they are behind. While producing outcomes well below one’s standards is never any fun, it is a process that we have been through periodically in our history, and we have always emerged stronger and better prepared to deliver on your behalf.

I am enormously grateful that our clients have stayed the course thus far, and I look forward to 2021 with a renewed sense of purpose and determination.

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