In his annual president’s letter, William Gray, from our offshore partner, Orbis, pays tribute to his father and reviews Orbis’ performance and prospects.
This year marks Orbis’ 30th anniversary. We are proud of the returns we have delivered for our clients since inception and are excited about our potential to add value looking forward. But our performance in recent years has been well below our standards, so we are hardly in the mood to celebrate. More personally, the passing of Allan Gray, my father and the firm’s founder, leaves me with both a heavy heart and a deep sense of determination.
From an investment perspective, 2019 was largely a year of more of the same with many now long-standing market trends extending even further. Continuing to lean against those trends was again painful, although mitigated somewhat by robust absolute returns for equities and bonds.
the passing of Allan Gray, my father and the firm’s founder, leaves me with both a heavy heart and a deep sense of determination
Many of the most rewarding investments in 2019 were those that the market considered “safe” or “predictable”. A shining example in this regard is Austria’s “century” bond. Owners of this bond entered 2019 with the prospect of a 1.75% annualised return over the next 98 years — particularly poor compensation for taking on such long-dated risk in our view. As it happened, they closed the year with a price return of over 35%, having gained as much as 80% when the price of the bond peaked in August.
today the premium one must pay for predictability looks excessive
The Austrian bond is much more than an amusing anecdote. Many of the biggest winners in global equity and bond markets in 2019 fell into this category — those with relatively predictable long-term futures — with their prices also rising sharply. While we have invested in such assets in the past, today the premium one must pay for predictability looks excessive. In contrast, the prices of investments in companies with less predictable and often more volatile cashflow streams, currently much more common in the Orbis funds, performed far less well ... again.
While this has been frustrating, it leaves us more optimistic for future relative returns. Asset prices can only rise faster than their underlying fundamentals for so long. The longer prices outpace fundamentals, the wider valuation gaps become, making risk profiles increasingly asymmetric. While the underlying fundamentals may remain safe and predictable, a rising valuation gap will eventually change any investment into a risky and volatile one as price becomes increasingly sensitive to any change in expectations. Even with an unchanged annual coupon, the price of the Austrian century bond rose by more than 35% in 2019. The converse is, of course, true for companies with valuations that assume less predictable fundamentals, which is what creates the opportunity for attractive relative returns.
All of this may sound obvious, but it never feels that way when the prices of predictable assets have risen as much as they have in recent years. It feels good to own them, and not owning them is extremely uncomfortable. But maintaining a disciplined focus on the relationship between intrinsic value and price is what successful long-term investing is all about. Some even say that value-oriented investing works because it hurts. Extended stretches of underperformance can test the patience of a firm’s clients, its investment team and its owners — but that’s what makes it so rewarding for those who can stick with it.
Nobody understood that better than Allan. He developed the distinctive investment philosophy that has been in place at Orbis since 1989 and at Allan Gray since 1973. Allan’s most enduring legacy might be the investment philosophy and approach he instilled in our investors, and the stable and aligned ownership structure that he put in place before his retirement in 2016.
You may wish to read "Allan's legacy" for a selection of the investment insights that have resonated most with those who worked closely with Allan over the years. Thanks to Allan, Orbis and Allan Gray are well positioned for the challenges that lie ahead.