Offshore investing - Allan Gray
Offshore investing

Russia-led volatility underscores the need for calm, considered action

As recently as last week, it was still unclear whether or not Russia would launch a full-scale invasion of Ukraine. It is now all too clear that Putin wasn’t bluffing. At times like these, our first thoughts are always with those who are in harm’s way.

As stewards of your capital, our responsibility is to remain calm, assess the impact on existing holdings in the Orbis funds, and evaluate any new investment opportunities that may arise amid extreme volatility. When markets are shocked by unexpected events, gaps between prices and fundamentals can open and close quickly – and it is in those moments when our investment decisions can make the most difference.

Impact on Orbis funds

The direct impact on the Orbis funds from exposure to Russian equities has been limited. Given the wide range of possible outcomes, including the potential for substantial losses, we reduced overall exposure to Russia in recent months.

Prior to the invasion on 24 February, our Global, International and Optimal Strategies all held less than 2% in Russia compared to positions of 3-5% at the end of October. Our Emerging Markets Strategy – which has greater appetite for Russian exposure given its investment universe – had just above 3%.

With perfect hindsight, the correct weight for all of the portfolios would have been 0%. Our rationale was that selected Russian shares were extraordinarily attractive and that small positions were warranted even after accounting for the risks.

As an illustration, our largest Russian holding across the Orbis funds has been Sberbank. It is a company we know well and have either owned or researched for more than 10 years. As of 23 February, Sberbank was priced at below four times earnings and offered a prospective dividend yield of 16%. At the time, this stood out as unusually compelling on both an absolute basis as well as relative to its banking peers elsewhere in the world. Sberbank has a dominant market share in Russia, consistently high return on equity, an excellent management team and substantial growth tailwinds thanks to relatively low levels of credit penetration in the Russian economy.

Under the current circumstances, however, Sberbank’s position as Russia’s largest bank has made it an obvious target for sanctions. This not only affects the fundamentals of Sberbank’s business, but also our ability to hold its shares in the Orbis Funds. We are evaluating all available options with our Sberbank holdings, while also monitoring the latest news on sanctions and related developments.

Looking for long-term opportunities

Beyond the immediate impact on Russian shares, we have looked for opportunities to take advantage of market volatility to add to shares of businesses that we believe will be unaffected over the long term. One of the great strengths of our research capability is that we always have a “wine rack” of well-researched companies whose shares are candidates for additional capital whenever they go on sale.

Some examples include Fleetcor and Global Payments in the US. Both are recent additions to our Global Equity Fund and both trade at significant discounts to the US market despite attractive long-term growth prospects. And, given the nature of their businesses – technology to help companies pay their bills and process payments – we believe that they should be almost completely unaffected by recent geopolitical events over the long term.

Amid the chaos, both Fleetcor and Global Payments appear safely ensconced in what we have referred to in past commentaries as the “Boring Middle” – a cohort of businesses that offer a compelling combination of growth and value.

Commodity-related shares have also been an extremely valuable source of diversification as oil and natural gas prices have risen sharply along with a range of agricultural commodities and metals. The latter should bode well for a number of holdings across the Orbis funds with commodity exposure, including Teck Resources and Vale – two positions we have added to recently.

A Pandora’s box of issues

Of course, we recognise that the facts can change very quickly and many questions remain unanswered. There is a whole Pandora’s box of issues for investors to unpack in the weeks and months to come. How will these developments affect the US Federal Reserve’s plans to raise interest rates? How much worse will inflation get? Will China be emboldened to attack Taiwan? What are the longer-term implications of a new Cold War?

These are tough questions. We certainly don’t have all the answers, and we are bound to get some of them wrong. The good news is that we don’t need all the answers in order to build a compelling portfolio of individual stock selections. You can also be confident that we will be prepared to act accordingly as circumstances change and fresh opportunities arise.

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