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Our Investment Process

  • 1
    Portfolio Construction »
  • 2
    Risk Management »
  • 3
    Currency Management »
  • 4
    Trading »

Portfolio Construction

Our portfolio construction process has always been designed to position the Orbis Funds where we believe the concentrations of fundamental value lie.

A Bermuda-based portfolio construction team, is responsible for determining how capital is allocated among the ideas of our selected analysts.

Portfolio construction should not be misinterpreted as second-guessing the selected analysts’ ideas but instead aims to ensure that their strongest ideas are appropriately represented in the portfolio. In doing so, it seeks to combine the strongest stock ideas into a portfolio that also reflects broader market and portfolio-level considerations, and also receives input from our risk and currency analysts. In aggregate, the portfolio represents what we believe is the best implementation of the best ideas of our selected analysts.

Our performance attribution system enables us to apply the principle of individual accountability throughout our investment process.

Portfolio Construction

Portfolio Construction

Risk Management

We define risk as the permanent loss of capital rather than short-term price volatility or the risk of underperforming our benchmarks over the short term. In many cases, the risk of permanent capital loss stems from overpaying for shares, which leads naturally to disappointing long-term returns. Our investment process seeks to identify undervalued companies with a significant margin of safety, which serves as a first line of defence against both the risk of loss and the risk of relative underperformance over the long term.

In managing portfolio risk, we do not set automatic stop-loss limits against adverse share price movements. In our view, a drop in price that is not accompanied by deterioration in the intrinsic value of the business presents opportunity, not risk. To manage the risk of deterioration in the intrinsic value, our equity analysts closely monitor business fundamentals and industry developments, and the investment case is regularly reviewed by senior investment professionals.

Although we do not take a top-down approach in picking shares, we recognise that our approach could result in concentration in certain sectors, countries or other characteristics. Our risk management process is designed to identify and quantify these exposures, and to alter the portfolio construction team in a structured, systematic way. A formal risk report is delivered to the portfolio construction team periodically, detailing key exposures and including recommendations to improve the risk profile of the portfolios. Importantly, these reports highlight where the Fund may be taking too much or too little risk.

Risk Management

Currency Management

Movements in the value of currencies can have a pronounced impact on a global investor’s returns, so managing currency risk is an important part of portfolio construction.

We actively manage the Orbis Funds’ currency exposure with the objective of delivering the return from our bottom-up stockpicking in a mix of currencies that are a good store of purchasing power for clients. Our primary focus is to avoid exposure to those currencies where we believe there is a risk of permanent capital loss and instead to seek exposure to those we believe are the best long-term stores of value. The risk to an investor’s long-term wealth does not come from a currency that has the potential to fall, but one that falls and fails to rise again.

Currency Management

Trading

Working closely with our portfolio construction team, our traders are responsible for the final implementation of investment ideas. Traders are expected to add value to overall performance with error-free trading and superior execution skill.

We view trading primarily as an exercise in risk management in that there can be tremendous downside if you make mistakes: small mistakes can potentially cost our clients a lot of money; large ones can put us out of business. We therefore go to great lengths to ensure that mistakes have a low chance of occurring. If they do, ideally they are detected quickly and processes are put in place to limit their chance of recurring.

Consistent with our belief in individual accountability, the majority of each trader’s year-end compensation is determined by his or her success in not making mistakes. We also have analysts who focus exclusively on trade analysis and making recommendations to minimise trading mistakes.

Trading

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