Weekend Argus (Saturday Edition)
Irish fund remains focused on the long term
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Ignoring market sentiment and sticking with companies that, despite short-term falls in profitability, have the potential to grow their earnings over the long term has again paid off for Jersey-based asset manager Contrarius Investment Management. For the second year in a row, its Ireland-registered Global Equity Fund has won the Raging Bull Award for top outright performance in the global equity sector.
The Contrarius Global Equity Fund (Ireland) returned an annual average of 32.25 percent in rands over the three years to the end of December 2014, 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 41 funds in this sector was 26.34 percent in rands. The benchmark for this sector, the Morgan Stanley Capital World Index, returned 26.99 percent a year for the threeyear period.
Contrarius has a valuation approach to investing: it buys shares that it believes are trading below their underlying intrinsic value and that are attractive relative to other available opportunities. The larger the discount at which a share trades to its underlying intrinsic value, the more attractive the share. Contrarius will sell shares that it believes have reached their underlying intrinsic value or that are less attractive than other opportunities it has evaluated.
Value investing is often focused on finding cheap shares characterised by low price-toearnings or price-to-book ratios. As a result, value investors often shun high-quality shares with aboveaverage long-term growth prospects in favour of companies with belowaverage long-term growth prospects, simply because the shares of the latter trade on low earnings multiples and therefore appear cheap. However, in many instances, these shares are trading at depressed multiples not because their prices are depressed, but because their earnings have experienced a period of above-average growth and are at a cyclical high. Contrarius says that its contrarian approach in assessing the underlying intrinsic value of a company takes into account the level of earnings and the potential for a company to grow those earnings over the long term. It tries to avoid companies that appear “cheap” but have substantial earnings, and therefore, price risk. As a result of this approach, Contrarius says its selection of shares may differ significantly from that of a typical global equity index.
Contrarius takes a long-term approach to investing, with a typical investment horizon of four years. In the short-term, prices tend to be driven primarily by market sentiment and the immediate earnings outlook, rather than the underlying value of the business.
Contrarius is a “bottom-up” investor, because its investment team determines the intrinsic value of each security in which it invests. So-called “top-down” investors choose shares more on the basis of macroeconomic factors.
Heaton van der Linde, a director of Contrarius Investment Management, says the fund has found attractive investment opportunities in the consumer discretionary and information technology sectors, and it has been overweight in both sectors for some time relative to the MSCI World Index. Consumer discretionary shares are those 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.
Apple, the United States-based computer company, is one of the major holdings that have done well for Contrarius over the past three years, Van der Linde says, despite being out of favour with the market for some of this period. Contrarius believes it is an attractive investment opportunity, because, after adjusting for its substantial net cash holdings, its share price continues to trade at a relatively low multiple of its free cash flow despite its long-term growth prospects.
Media company the New York Times (NYT) remains one of Contrarius’s major holdings and contributed positively to the three-year return, even though the share contributed negatively to the performance of the fund over the past year.
In line with its long-term, valuation and contrarian approach, Contrarius believes that the market has failed to realise the share’s true value. Since early 2011, the NYT has moved from having net debt to having net cash, largely by selling non-core assets. It has been proactive in converting print readers into digital readers. It has some 875 000 digital subscribers, and derives over 50 percent of its revenue from circulation revenues (including digital subscriptions), Van der Linde says. The company’s ability to adapt to changes in the newspaper industry suggests that the NYT will continue to grow its revenues from digital channels.
Another share that did well for the fund over the past three years was the United Kingdom-based online grocery retailer, Ocado, Van der Linde says. Revenues from traditional grocers have shown little growth over the past five years, but online retailers have been growing revenues at about 10 to 15 percent a year.
Looking ahead, Van der Linde says the fund continues to hold a large weightings in US and Japanese equities and remains substantially underweight in European equities relative to those regions’ weightings in the MSCI World Index. Although developed markets remain attractive, Contrarius is starting to find more value in emerging market shares. The collapse of commodity prices has recently created opportunities in the materials sector, in particular in precious metals-related equities, and the fund’s holdings in that sector have increased to 16 percent of the portfolio.
The fund’s minimum investment is a lump sum of $25 000. The fund charges an annual management fee of 1.25 percent and a performance fee of 20 percent of the outperformance of the benchmark. – Mark Bechard