A Contrarian Approach During Covid-19

While many investors focus on buying the big winners, contrarians look for hidden gems - Orbis's Ben Preston backs companies whose share prices don't reflect their true value

Annalisa Esposito 29 May, 2020 | 10:20AM
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The world is facing unprecedented times. With no indication how soon a vaccine will arise or global economies will recover, investors must work out how best to deal with the uncertainty.

Ben Preston, co-manager of the Silver-rated Orbis Global Equity fund, says investors have two options: take a crystal ball out or take his approach. “I prefer to look at one company at a time, evaluate its strengths and weaknesses, and assess its intrinsic value,” he says. “This gives us a balanced portfolio, which is not dependent on one particular view of the future.”

As a contrarian investor, Preston's portfolio looks very different from many other global funds. For instance, he is underweight in his exposure US compared to the fund's benchmark, the MSCI World index. 

But swimming against the stream isn't always easy and the fund has underperformed it peers in recent years. The fund has produced annualised returns of 3.23% over the past three years, some 0.76 percentage points behind the average fund in its Morningstar Category. “We have shied away from the 'big winners', thinking their prices were excessive,” he explains. “What matters for us is the true value of a business and how much we would pay for it.”

This strategy is also known as value investing, and it is a style that has been out of favour for a number of year while growth stocks such as Amazon (AMZN) and Tesla (TSLA) have been on a continuous upward charge. It's a trend that has continued even during the Covid-19 induced sell-off. 

Preston says: “We know we are going through short-term underperfomance and we have the 'I told you so' risk, but the silver lining is that the more the share prices deviate from their long-term worth, the greater the opportunity when they do finally trade back at their true value.”

Morningstar analyst Andrew Miles shares this outlook. "Even though its short-term performance has been poor we still have conviction in Orbis Global Equity to outperform," he says. 

Counter-Intuitive Opportunities

Recently, Preston has been looking for resilient cyclical companies with good future growth prospects. He likes Germany car maker BMW (BMW) and leading provider of aluminium Arconic (ARNC). About BMW, he says: “It has the strongest balance sheet in the auto sectors, is very advanced in electronics and has a strong brand.”

The stock is rated five stars by Morningstar analysts, indicating that the shares are trading below their fair value. The stock has been hit in recent weeks by concerns about the effect of a global recession on the autos industry. Preston says: "BMW was good value before the pandemic struck and the share prices have fallen even further. In the short-term coronavirus will have an impact on the earnings, but the business a bright future ahead.”

Another theme he likes is companies benefitting from structural change in society, trends which have been accelerated by the coronavirus. Stocks set to benefit from this include Chinese e-commerce giant Alibaba (BABA) and Vestas (VWS), the wind turbine producer. “They are reasonably priced and good long term prospects,” says Preston. 

The fund manager has recently narrowed down the number of names in the portfolio, cutting down the tail of smaller positions which "didn't add much value" to focus on larger holdings where he has greater conviction. He has sold, for example, his stake in Imperial Brands (IMB) and instead added to his investment in British American Tobacco (BATS): “We lost confidence in the investment thesis and when we realise we are wrong, we are not going be stubborn about it.”

He also sold some airline companies because they didn’t offer that margin of safety in the current crisis, preferring instead aircraft engine maker Rolls-Royce (RR.), which has a stronger balance sheet.

In the healthcare space, there has been huge amount of speculation around a potential vaccine for coronavrius and which company might develop it. But Preston, is looking instead  to the opportunity in health insurance companies, which he believes will benefit from reduced costs as people stay away from hospitals for non-urgent procedures. "It’s a counter-intuitive opportunity, I know; you would think that a company with high healthcare costs would be hit in current environment but actually it’s not going that way.”

Such bets have helped performance in recent months. While the fund is down 2.12% year to date, it is 1.25 percentage points ahead of its Morningstar Category average. With much uncertainty still ahead, however, Preston says the best strategy is: "Keep a cool, calm head and buy the types of company where you can look back in five or ten years and be glad you bought at today’s prices."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Annalisa Esposito  is a data journalist for Morningstar.co.uk

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