Contrarian investing: how to profit by going against the crowd

Diversifying through a contrarian lens

At Orbis, we pride ourselves on our contrarian philosophy. That involves taking views that others might oppose and looking for opportunities in places that others might overlook.  Imagine holding a basket under the market and catching opportunities that have been discarded or overlooked. We sift through these to find and invest in undervalued ideas that we believe have the potential to generate above-average long term returns. It’s like finding a needle in a haystack, but it’s what we excel at—for over 30 years we have been empowering our clients to achieve their goals.

Rethinking the 60/40 portfolio

For decades, the traditional 60/40 portfolio (60% stocks and 40% bonds) has been a staple for diversification. And for the last 40 years, investors have had a great run as ever-lower interest rates and inflation drove most financial assets higher. When equities zigged, bonds zagged, providing ‘balance’. However, the investment world is changing.

Interest rates have risen from zero, and higher interest rates tend to weigh on asset prices. Rates have risen in response to higher inflation, and with higher inflation, stocks and bonds tend to be positively correlated negating the famed diversification of the 60/40 portfolio. This means equities and bonds start to rise and fall in tandem. 2022 was a prime example, and investors in traditional 60/40 portfolios experienced their worst year since the global financial crisis.

At Orbis, we look at every security on its merits and then we make those securities compete for client capital. If an idea doesn’t improve the risk-reward balance, then it’s not going to be in our portfolio. For example, we have no exposure to long-term US nominal government bonds, and instead hold other lower risk assets like gold or hedged equities. This flexibility allows us to control risk more effectively. This is crucial in today’s dynamic environment, where traditional strategies may no longer offer the same safety net. 

Keeping an eye on the longer-term picture

Flexibility within our portfolios also allows us to better respond to whatever the market throws at us. Over the last few years, inflation has been a hot topic. While inflation may well dip to 2% or lower in the short term, we see persistent pressures keeping it higher over the long term: rising labour power, the reversal of globalisation, increased defence spending, and the costly transition to cleaner energy. While inflation poses challenges, it also opens up significant investment opportunities that we are well-positioned to capitalise on.

Among these opportunities, the energy transition is particularly compelling. Many Western countries, including the US and UK, have ageing energy systems that are overdue for an upgrade—a need intensified by the push towards renewable energy. The US alone requires trillions of dollars of investments over the next 25 years to update its electric grid, presenting compelling opportunities for companies leading these upgrades. Consequently, many of our investments in the energy transition are investments in the boring bits of the system.

Valuation as our compass

While the energy transition and similar themes present compelling opportunities, valuation remains our guiding compass. The UK has been the world's cheapest market for the past four to five years and has only become more attractive. However, UK companies continue to trade at much lower valuations than their American counterparts which are worth 22 times earnings. We don’t believe UK companies are worth 4/5 times earnings, so have been investing in businesses that we believe are promising long-term franchises. We are also seeing positive earnings surprises from British companies, which could indicate a potential recovery.

Usually, there is catalysts for markets to trade higher. What we have been seeing is that eventually, if governments get enough pressure, they start to take measures to make their markets more attractive. Japan is a great example. Through the Tokyo Stock Exchange, it implemented regulation to ‘name and shame’ companies that were trading at low valuations and not meeting guidelines on financial reporting and governance. Korea is now following a similar approach—could the UK be next? Maybe it’s already happening as investors scour the world for great opportunities as the economy stabilises.

At Orbis, our investment strategy is all about finding undervalued opportunities in a complex and changing market. By sticking to our contrarian approach, conducting thorough research, and staying flexible in our asset allocation, we aim to deliver consistent returns while managing risk effectively. Our approach ensures that we’re not just riding the waves of market trends but strategically diving into the depths to uncover true value.

Disclaimer

The contents of this communication have been approved for issue in the United Kingdom by Orbis Investments (U.K.) Limited which is authorised and regulated by the Financial Conduct Authority. Orbis Investments (U.K.) Limited and Orbis Investment Management Limited are members of the Orbis group of companies (“Orbis”).

This communication does not constitute an offer, solicitation or recommendation to buy, sell or hold any interests, shares or other securities in the companies mentioned in it. Orbis has not considered the suitability of this investment against your individual needs and risk tolerance. You must not rely upon this communication or any part of it as investment advice and Orbis does not assume and will not accept responsibility or liability (whether arising in contract, tort, negligence or otherwise) for any error, omission, loss or damage (whether direct, indirect, consequential or otherwise) in connection with the information in this communication and disclaims any such liability to the maximum extent permitted by law. This communication represents Orbis' view at the date stated and may provide reasoning or rationale on why we bought or sold a particular security for a fund. We may take a different/the opposite view/position from that stated. This is because our view may change as facts or circumstances change. This communication has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Entities and employees of Orbis are not subject to restrictions on dealing in relevant securities ahead of the dissemination of this review.

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