By zigging where others zag, Orbis Investments' contrarian investment strategy finds undervalued assets overlooked by the mainstream. Alec Cutler, Manager of the Global and Cautious Funds, discusses how this can deliver impressive returns.
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.
