Allan Gray’s $2.6 billion Australian equities fund has achieved remarkable outperformance in a challenging market, a period marked by rival fund closures and a declining local sharemarket. Portfolio manager Suhas Nayak attributes this success to the fund’s contrarian investment philosophy. Nayak, co-managing with CIO Simon Mawhinney, deliberately acquires stocks when others are divesting and sells during periods of market optimism. This approach aims for returns dislocated from broader market trends, with the fund explicitly stating its strategy can lead to volatility by leaning into troubled market segments in pursuit of long-term rewards.
This contrarian method involves investing in companies currently out of favour. Nayak notes, “We like to buy companies where really ugly earnings are reflected in the share price, and often things just need to be a little less bad for the share price to do well.” An example of this strategy’s inherent risk is the fund’s investment in Endeavour Group, the owner of Dan Murphy’s and other liquor retail businesses. Allan Gray acquired the stock after a significant tumble, only for its value to decline further due to industry headwinds. Mawhinney admitted being “too early” with the initial investment, yet the fund retained its holding, confident in a domestic liquor sector recovery.
Despite individual challenges like Endeavour, the Australian equities fund delivered an impressive 20 per cent return over the past year. This significantly outpaced its benchmark by 17.6 percentage points, sharply contrasting with the S&P/ASX 200 Index’s nearly 3 per cent fall. The fund has also consistently beaten the market over three, five, and ten years. Key contributors to this strong performance include winning bets on CSL, a global blood plasma giant, and Ansell, a leading medical glove and protective wear manufacturer. Nayak is now rebalancing, taking profits from strong performers and increasing stakes in perceived undervalued companies such as property investor Dexus, believing their prices already reflect current concerns.
