Global stock picker delivers again

[First published in Personal Finance, January 2017]


Raging Bull Award for the Best FSB-approved Offshore Global Equity Fund on straight performance over three years to December 31, 2016

Certificate for the Best FSB-approved Offshore Global Equity General Fund on risk-adjusted performance over five years to December 31, 2016

Individual stock picks, including the likes of Apple and some unloved global resources companies that performed really well in 2016, helped Jersey-based asset manager Contrarius Investment Management win its third Raging Bull Award for top performance in the global equity sub-category.

The fund has previously received Raging Bull Awards for its top outright performance in this category in 2015 and in 2014.

For the three years to the end of December last year, the Contrarius Global Equity Fund (Ireland) returned an annual average of 15.43 percent in rands, beating its peers in the ProfileData global equity general sector of offshore funds that have been approved by the Financial Services Board to be marketed in South Africa.

The average annual return of the 74 funds in this sector was 6.29 percent in rands. The benchmark for this sector, the Morgan Stanley Capital World Index, returned 11.43 percent a year for the three-year period.

According to the fact sheet, the fund had negative annual returns in 2014 (–3.9 percent) and 2015 (–17.9 percent), but earned 48.5 percent last year. In all three years, the fund out-performed its benchmark, the MSCI World Index, because it typically invests quite differently from the benchmark.

Contrarius is a valuation-based investment manager – it seeks out shares that it believes are trading below their underlying intrinsic value and are attractive relative to other investment opportunities. The manager sells shares when they have reached their underlying intrinsic value and are less attractive relative to other investment opportunities.

The manager describes its approach to value investing as contrarian, and says although researching the intrinsic value of a company is important, it also considers the profits cycle, avoiding companies that appear cheap, but where there are substantial risks to profitability.

Contrarius takes a long-term approach to investing, with a typical investment horizon of four years. The manager believes that the key to out-performing investment markets in the long term is to focus on the long-term value of a business, rather than short-term news flow. In the short term, stock prices tend to be driven by market sentiment and the immediate earnings outlook rather than the underlying value of the business.

As Contrarius considers each share relative to all the other investment opportunities, it does not favour any particular sectors, Heaton van der Linde, a director of Contrarius, says.

Over the first part of the three-year period to the end of December, the fund benefited from the performance of technology stock Apple, as it continued to build out its powerful ecosystem, Van der Linde says. The fund continues to hold these shares.

The manager also used the significant falls in the prices of commodities in recent years to buy up resources shares that were trading significantly below their fair value and these have contributed to out-performance over the past year, Van der Linde says.

For example, the company invested in Canada’s resources share, Teck Resources, a producer of several commodities that it believes are attractive from a long-term demand perspective (including metallurgical coal, zinc and copper).

Investors, however, became extremely pessimistic on all commodity-related shares, which created a significant opportunity for Contrarius to acquire shares at a price well below its assessment of the company’s underlying intrinsic value.

Fortescue Metals Group, a low-cost resources producer listed on the Australian stock exchange, has been shunned by investors since iron ore prices fell to what were, in the manager’s opinion, unsustainably low prices, Van der Linde says.

As iron ore prices recovered over the past year, Fortescue has begun generating significant cash flow and rapidly repaying its net debt, leading to good returns for Contrarius’s Global Equity Fund.

For the year ahead, the fund is overweight relative to the MSCI World Index, in energy and materials shares and consumer discretionary and technology stocks, according to Van der Linde.

Apple and The New York Times, which the fund has held for some time, continue to be large holdings. Contrarius believes the New York Times has been successful in converting print readers to digital and has sold off its non-core assets.

The fund’s largest holdings in the materials sector include Fortescue and Vale, which Contrarius believes continue to be very attractively priced despite their recent out-performance, Van der Linde says.

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