Rudi's View | May 29 2025
By Rudi Filapek-Vandyck, Editor
"We are not value investors, we are contrarians".
Funds managers Allan Gray and Orbis reeled out Chief Investment Officer Simon Mawhinney and Head of Global Investment Team Simon Skinner respectively of both related managers (the original Allan Gray started both in respectively 1973 and 1989) for a presentation to financial planners and media in Sydney earlier today (Thursday).
The opening quote perfectly summarises the investment style behind both strategies (local and international) as well as why both presentations contained plenty of warnings about investors blindly following market momentum and the crowd.
Taking a contrarian approach has a lot to do with going against the dominant market trend which, as history shows time and again, might eventually end with asset prices too far ahead of intrinsic value, and thus biding time for the next disaster to happen.
No surprise, anno 2025 the prime example of a share price that seems too far remote from reality is that of CommBank ((CBA)) locally. Both Allan Gray and Orbis are long-only investors, meaning they only take positions in shares with the aim of enjoying capital appreciation and income over time.
Short positions to gain from a lower share price further out are not part of the strategy, but Mawhinney, in a brief one-on-one conversation afterwards, did declare that if Allan Gray would be in a position to go short on one stock today, he would nominate CommBank.
No other ASX-listed stock embodies the pushback to a contrarian view as much as Australia's most popular, largest, highest valued, and best performing bank.
Conversations with local advisors tend to mostly range from staunch resistance to flatout disbelief when Mawhinney suggests that share price is fundamentally worth less than $100.
Responses vary from "it's the largest holding in portfolios" to "we just own it and it keeps on going up". To Simon and Simon these conversations have red flags all over them, but try to get that message across when share market momentum has been so strong, and so lopsided as it has been over the past three years.
85% of investment returns in Australia, as measured through the ASX200, has come from eight stocks only; the big four banks, with CommBank in the lead, plus Wesfarmers ((WES)), Goodman Group ((GMG)), Aristocrat Leisure ((ALL)), and Macquarie Group ((MQG)).
Not necessarily denying the quality and growth that has driven those gains, but this also means the index weight of those eight is rising too, as does the concentration of many an investment portfolio.
Similar observations can be made about US indices, as well as about US markets versus the rest of the world, about developed markets versus emerging markets, and about large cap companies versus their smaller cap peers.
For your typical contrarian investor, all those trends from the past years --some have been in place for a decade or longer-- smack of too much momentum-following and position crowding, the common belief that trends keep on going on forever, and that fundamental valuations can be ignored indefinitely.
2024 was the year of momentum trades and by year-end valuations looked pretty spicy, to put it mildly. Portfolios managed by Allan Gray and Orbis had been underperforming, but it seems the tide has turned in 2025.
Both Simons are hopeful the gap between yesteryear's winners and losers might narrow further, allowing their contrarian, more value-based positions to continue outperforming.
Allan Gray's hot tip for the year(s) ahead is Ramsay Health Care ((RHC)) where the share price is now at levels last seen in 2012 (!), and just about everyone outside of a few die hards and your dyed-in-the-wool value investors, has by now given up on this share price ever trending back upwards again.
Time to take a contrarian view. When asked about risk assessment in our conversation afterwards, Mawhinney explained the strategy is not simply about picking up assets trading below fundamental value. A healthy dose of risk assessment is equally part of the decision-making process.
In simple terms: if 10% more downside risk is outweighed by 90% upside potential, it is worth jumping on the contrarian opportunity. Even then, a long-term horizon remains necessary.
Ramsay Health Care already looked a great opportunity at a higher price and Allan Gray started accumulating while the share price wouldn't stop falling. Today that position remains under water.
This does not deter from the conviction that margins for the private hospital operator are at or near rock bottom and only have one way to go from here, albeit with the understanding that more patience might be required.
The portfolio also owns Nufarm ((NUF)) in what can probably best seen as cheaply priced companies can still surprise to the downside, irrespective of market sentiment and investor positioning.
Other holdings that to date haven't exactly shot the lights out include Amcor ((AMC)), Dexus ((DXS)), Lendlease Group ((LLC)), and Dyno Nobel ((DNL)).
Looking at the top ten holdings for the Allan Gray Australia Equity Fund, it is not difficult to decipher the contrarian, value-oriented approach (in order, largest holding first):
-Woodside Energy ((WDS))
-Ansell ((ANN))
-Newmont Corp ((NEM))
-ANZ Bank ((ANZ))
-Alcoa ((AAI))
-QBE Insurance ((QBE))
-Woolworths Group ((WOW))
-Fletcher Building ((FBU))
-Orora ((ORA))
-Telstra ((TLS))
One holding does stand out: ANZ Bank? Yep, it's the cheapest in an overvalued sector, acknowledges Mawhinney. The fund owned Bank of Queensland ((BOQ)) shares earlier, but has swapped those for ANZ.
Another discrepancy is Mawhinney's fondness for having exposure to gold, an affinity not shared by Skinner it has to be said, as the price of gold hasn't exactly been a laggard in recent years.
The fund has started to gradually reduce exposure to the metal in exchange for shares in the likes of Newmont with both Newmont and Barrick Gold seen as undervalued, in particular against much smaller operators on the ASX with much shorter asset lives left.
While some individual commodity stocks might appear in portfolios, both Simons explained there's no general appetite to move ears pinned back into commodities, regardless of their relative underperformance, and this includes uranium and lithium.
It's better to wait until capex programs are being wound back and supply curtailed, is the suggestion, after which, regardless of demand growth, a gap will open up between supply and demand.
This is not the situation today. And neither is China looking to announce the next big bang stimulus program.
Skinner's advice to investors is to be aware of how much market concentration has taken place under today's highly-priced major indices. Simply assuming that what has worked out well thus far is going to continue might not be the right approach. He looks very favourably towards undervalued Emerging Markets.
Orbis' hot stock tips are Smurfit Westrock, a global leader in sustainable paper-based packaging, and diversified Asian conglomerate Jardine Matheson. Both are seen as trading well below intrinsic valuation.
Both charts shown are from today's presentation and have been included with permission. The first is from Allan Grey (Australian banks) the second (above) is from Orbis.
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