Wise stock picks give Contrarius the edge

[First published in Personal Finance, September 2014]

The fund that won the Raging Bull Award for the best offshore global equity is managed by a company with strong links to South Africa.

The Contrarius Global Equity Fund (Ireland) returned an annual average of 16.79 percent in United States dollars over the three years to the end of December last year, beating its peers in the ProfileData global equity sector of offshore funds that have been approved by the Financial Services Board to be marketed in South Africa.

The average return of the 41 funds in this sector was 8.61 percent a year in US dollars. The benchmark for this sector, the Morgan Stanley Capital Index, returned 9.07 percent a year for the three-year period.

The Contrarius fund earned the award on its returns in rands, which were 35.82 percent a year over three years. The returns were boosted by the sharp depreciation of the rand over the past year.

Contrarius is a Jersey-based asset manager founded by a former chief investment officer of Allan Gray in South Africa, Stephen Mildenhall. Mildenhall started Contrarius after leaving Allan Gray and the country in 2008.

Contrarius, like Allan Gray, is a long-term investor that invests in a share when its market price is below what the manager regards as the share’s true value based on business fundamentals and the future earnings of the company.

Known as a valuation-based investor, Contrarius buys shares when it considers them to be attractive relative to the other opportunities it has evaluated. The larger the discount at which a company’s shares trade to the underlying intrinsic value of the shares, the more attractive the stock.

When discounted shares reach their underlying intrinsic value, Contrarius sells them. Contrarius is of the view that consistently applying this investment philosophy is what drives its long-term performance, Heaton van der Linde, a director of Contrarius, also previously with Allan Gray, says.

While Contrarius does not invest on the basis of sectors, it has for some time found attractive opportunities in the consumer discretionary and technology sectors, Van der Linde says.

Contrarius is what is known as a “bottom-up” and a “contrarian” investor, because its investment team determines the intrinsic value of each security in which it invests.

So-called “top-down” investors choose shares on the basis of the sector or industry they represent. Bottom-up investors are also often contrarian, because a fund’s stock selection can differ significantly from that of its benchmark index.

Consumer discretionary stocks are those of companies that provide goods or services that people can do without. These are the opposite of companies that provide goods and services that consumers need and will continue to buy despite an economic downturn. The earnings of consumer discretionary shares are generally regarded as more cyclical and are expected to do well when underlying economies improve, Van der Linde says.

Two of the consumer discretionary shares that the fund invested in are media companies: the New York Times and Gannett.

Gannett is a US-based business that has traditionally been regarded as a newspaper company but which has meaningful television broadcasting and online interests.

Contrarius also invested over the past three years in Apple, the US-based computer, tablet and smartphone company, because it is of the view that it offers a very attractive investment opportunity, considering its cash flows and long-term prospects.

Another share that did well for the fund was the United Kingdom-based online grocery retailer, Ocado, Van der Linde says.

The fund has generally been overweight in North American shares over the past three years, and for the past year has been overweight in Japanese shares, relative to the weightings those regions represent in its benchmark, the MSCI World Index. This was a result of stock-picking rather than any country-specific bets, he says.

Van der Linde says Contrarius’s investment team is currently not finding as many attractive opportunities in Europe or emerging markets versus other regions.

Looking ahead, he says that Contrarius will continue to look for attractively priced long-term investment opportunities despite the increase in the MSCI World Index this past year.

The fund charges an annual management fee of 1.25 percent and a performance fee of 20 percent of the out-performance of the benchmark.

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