Allan Gray Australia Equity Fund – investment approach

Funds Management

by Carolyn Herbert

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Transcription of Finance News Network Interview with Allan Gray Australia Equity Fund Co-portfolio Manager, Dan Abeshouse
Natalie MacDonald: The Allan Gray Australia Equity Fund aims to deliver long-term market beating returns, through its contrarian investment style. I’m Natalie MacDonald for the Finance News Network. Joining me now is Allan Gray Australia Equity Fund Co-portfolio Manager, Dan Abeshouse. Dan, welcome to FNN.
Dan Abeshouse: Thanks very much Natalie, glad to be here.
Natalie MacDonald: Can you start firstly by introducing the Fund?
Dan Abeshouse: Allan Gray Australia manages about $3 billion for our clients. And the Allan Gray Australia Equity Fund invests in ASX listed companies, with a long-term investment horizon. And our objective is to outperform the ASX 300 Accumulation Index, net of fees, over that five-year plus period of time. And we do that with an investment philosophy that has three main components.
Long-term in its investment horizon, as I said, five-plus years is the way that we approach our investments. Fundamental in nature and by that, we mean that we focus on the fundamentals of the business that we invest in. What do they do, how do they make money, what kind of cash flows do they produce over the long-term, in our expectation. And most importantly, how does that all relate to the price that you pay for the company today, on the market.
And thirdly, contrarian and by that we mean looking for companies that aren’t the flavour of the month, that might be out of favour. Or perhaps even hated by the broader market, because often when expectations are low, that’s when you can find rewarding investment opportunities.
Natalie MacDonald: Why do you think this philosophy can outperform?
Dan Abeshouse: We find that in the short-term the market can have a tendency to overshoot, both on the upside and the downside. And what that means is that when people are very excited about a company, a sector, when expectations are high often that can result in the price being higher, than maybe it really should be. And conversely for companies out of favour, which are not the flavour of the month, we find that sometimes that can present opportunities to invest, at a price that’s more attractive than what you’d expect it to be.
And then over the long-term, if you’re patient, if you were willing to stay the course through the rough periods, we would expect that things will revert to a normal situation. And the companies that you bought into at those depressed times, will be rewarding investments. And in fact, if we look at our experiences over time, that’s proven to be the case.
Natalie MacDonald: You say the strategy has been proven over the long-term. How long have you been running for and what has performance been like over that time?
Dan Abeshouse: We’ve been offering the Fund in Australia since 2006. And we’ve outperformed our benchmark, net of fees over that period of time, by about one per cent per annum. And in fact if you look back just a year ago, that number was two per cent since the initial launch of the Fund, which indicates that you can have some short-term variation. And in fact, the last year for us has been quite a big variation compared to the benchmark, negatively. And that’s par for the course of what we do.
If you’re trying to outperform the index, you have to look quite different to it in the composition of your portfolio. And in our case over the last year, that’s meant that some of the companies we’ve been in, like Woodside Petroleum Limited (ASX:WPL), Origin Energy Limited (ASX:ORG), Metcash Limited (ASX:MTS) have had a harder time. But conversely that’s often the times when it’s most exciting to be investing.
Natalie MacDonald: There are miners and energy companies in the top 10 stocks, sectors which are really disliked at the moment. Can you tell us perhaps why you hold these and what your performance outlook is for these sectors?
Dan Abeshouse: The mining and energy stocks have definitely had a very tough 12 months. And as you would expect with our investment philosophy, that’s where we’ve been focusing our attention. And so companies like Origin Energy, Woodside Petroleum, as well as some goldmining companies, Newcrest Mining Limited (ASX:NCM), aluminium mining companies like Alumina Limited (ASX:AWC), all feature in our top 10 stocks.
And for all of these companies, the interesting thing is that they continue, even at a low point in their cycles, to produce very strong cash flows. And generally have good long-term reserves that are at the lower cost end of the cost curve. But if you’re patient and wait for the cycle to normalise, you might find that picking those companies up today, is actually good value. And that’s what we expect to see over a longer-term horizon.
Natalie MacDonald: Last question then Dan. Who should invest in this Fund?
Dan Abeshouse: We think that the Fund is suitable for anyone who wants to invest in Australian shares, but is looking for a return that is superior to the market. And the way to achieve that is by having a fund manager, who’ll actually have a portfolio that looks very different to the market. Who has a long-term approach and who is willing to be patient, and not follow the herd and over time produce that better return.
Natalie MacDonald: Dan Abeshouse, many thanks for the update.
Dan Abeshouse: Thanks very much.