Over very long periods, value stocks have generated superior returns. But those returns haven’t come in a straight line, and stocks with low price multiples are more attractive at some times than at others. In March, we highlighted that value stocks were exceptionally attractive after lagging their growth counterparts for an unusually prolonged period. Our interest in value’s underperformance is not academic—our investment philosophy has similarities with a value approach, and our stock selections have fared better in periods when value has done well.
The Wall Street Journal ran a series this month commemorating the rise of passive investing. The articles make “the case for the triumph of passive”, calling active management a “dying business” because “investors are giving up on stockpicking.”
Few issues in investment management are more contentious than fees. In this paper, we argue that the two most common fee structures—fixed fees and performance-based fees with high water marks—both suffer from serious flaws. We also propose what we believe is a better alternative: a performance-based fee with a symmetrical refund mechanism that better aligns incentives and also increases the likelihood that the fees paid reflect the value added for clients.
We have noted previously that avoiding mistakes—or playing the “Loser’s Game”—is critical in the current market environment. In our assessment, minimising losses is arguably more important than maximising gains at a time when many stockmarkets in the developed world appear fully valued. That’s not to say we cannot find attractive investment ideas in this environment, but it does mean that we must be even more vigilant than usual when assessing the risk-return proposition in individual shares.
Our investment approach is sometimes simplistically characterised as “looking for cheap stocks”. While we are always on the lookout for large dislocations between share prices and our estimate of intrinsic value, these opportunities can present themselves in different forms depending on the market environment. For example, back in 2009, it was easy to find classically “cheap” stocks in the aftermath of the global financial crisis. The more difficult part was deciding how to allocate capital amongst plenty of ideas.
This Report does not constitute advice nor a recommendation to buy, sell or hold, nor an offer to sell or a solicitation to buy interests or shares in the Orbis Funds or other securities in the companies mentioned in it (“relevant securities”). It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Orbis, its affiliates, directors and employees (together, the “Orbis Group”) are not subject to restrictions on dealing in relevant securities ahead of the dissemination of this Report. Subscriptions are only valid if made on the basis of the current Prospectus of an Orbis Fund.
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