TAKING A DIFFERENT TACK TO BEAT THE PACK - MARCH 2021 - Heathcote Investment Partners
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TAKING A DIFFERENT TACK
TO BEAT THE PACK
MARCH 2021
AGENDA • A sailor’s tale • The returns accruing to perfect foresight • Taking a different tack to beat the pack (today) 2
A SAILOR’S TALE 3
TAKING A DIFFERENT TACK
Finish line
Wind
4BEATING THE PACK
“We’ve never followed the crowd, even in business, and we’ve done the same
here.
Today on one tack we took a risk and went inshore and stormed past boats.
After the final turn we were so far ahead we thought we’d done something
wrong!”
Source: Sail-World.com, Oyster Regatta Palma – “Willful lot on the final day”, October 2014
5SOME KEY TAKE OUTS
“We’ve never followed the crowd, even in business, and we’ve done the same
here.
Today on one tack we took a risk and went inshore and stormed past boats.
After the final turn we were so far ahead we thought we’d done something
wrong!”
Can’t have this unless….
• Face uncertainty • Doing things differently to consensus
• Relative risk • In the minority
Source: Sail-World.com, Oyster Regatta Palma – “Willful lot on the final day”, October 2014
• Willing to look wrong
6DO THE SAME RULES APPLY TO SUPER HERO INVESTORS? Source: Shutterstock 7
THE RETURNS TO PERFECT FORESIGHT
Value of $10,000 Invested in October 1982 for 37 Years
$10,615,573
$627,377
Hero Advice Portfolio ASX All Ords
Source: Morningstar and Allan Gray Australia. ASX All Ordinaries Index and hypothetical hero adviser portfolio performance. Data to 30 Sept 2019.
8THE RETURNS TO PERFECT FORESIGHT
Growth of $10,000 Invested in October 1982
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
1982 1987 1992 1997 2002 2007 2012 2017
Hero Advice Portfolio ASX All Ords
Source: Morningstar and Allan Gray Australia. ASX All Ordinaries Index and hypothetical hero adviser portfolio performance. Data to 30 Sept 2019.
9FIVE WORST 12 MONTHS UNDERPERFORMANCE
Date Underperformance
Aug 1986 - Jul 1987 -18.4%
May 2007 - April 2008 -15.8%
Feb 2005 - Jan 2006 -13.9%
Dec 1988 - Nov 1989 -12.6%
Feb 2016 - Jan 2017 -9.4%
Source: Morningstar and Allan Gray Australia. ASX All Ordinaries Index and hypothetical hero adviser portfolio performance.
10SOME CONFRONTING STATS
200
Largest relative
180 underperformance at
39%
160 Zero net
outperformance
for more than 4
140 years
120
100
Worst drawdown point
80
Hero Advice Portfolio S&P/ASX 300
Source: Morningstar and Allan Gray Australia. ASX All Ordinaries Index and hypothetical hero adviser portfolio performance. Data December 2004 to 30 Apr 2009.
11CHARACTERISTICS OF THE WINNING FUND MANAGERS
• Variation of relative performance (“tracking error”) of these funds were high
• The holdings of the managers were significantly different to that of the
market
• More likely to outperform in falling markets than rising markets
• Average outperformance was higher in falling markets than rising markets
12WHAT CAN WE TAKE FROM THIS? • If you are willing to look different, you have a chance at outperformance • Know your basis for investing • Invest where you can have conviction and patience • Most challenging times often represent opportunity 13
IS TRACKING ERROR (DIFFERENT PERFORMANCE) REALLY SO SCARY?
10 Year Tracking Error vs Alpha - Australian Large Equity Managers
10
8 Chance of outperforming
with funds < 4% tracking
6
error: 20.7%
4
Alpha
2
0
-2
Chance of outperforming
-4 with funds > 4% tracking
error: 65%
-6
0 1 2 3 4 5 6 7 8 9 10
Tracking Error (%)
Source: Morningstar and Allan Gray Australia as at 30 Nov 2019. All managers under Morningstar Large Blend, Growth and Value Categories. Calculation benchmark is ASX 300.
14HOW THIS DRAWDOWN AND RECOVERY COMPARES
1.30 Three Largest Relative Performance Drawdowns
1.20
Performance
relative to 1.10
ASX 300
Accumulation
Index
Starting point:
1.00
Feb-08
Jul-14
0.90 Sep-19
Where we are
0.80
0 4 8 12 16 20 24 28 32 36 40 44 48
Months
Source: Allan Gray Australia Equity Fund A, as at 31 December 2020
4 15ALLAN GRAY AUSTRALIA EQUITY FUND - PERFORMANCE vs PEER GROUP
Allan Gray – performance quartile within
category
Morningstar Category 10Y 7Y 5Y
Equity Australia Large Value 1st 1st 1st
Equity Australia Large Growth 2nd 2nd 2nd
Equity Australia Large Blend 1st 1st 1st
All Equity Australia Large 1st 1st 1st
Source: Morningstar & Allan Gray Australia, as at 31 December 2020. Performance is shown over 5, 7, & 10 years given the Fund’s recommended investment timeframe is at least
5 years.
12 16HUGE DISPERSION IN SECTOR VALUATION – PRESENTS OPPORTUNITY
80 20
16.0
Forward P/E ratio
60 57.0 15
12.0
40 34.5 10
25.4 27.3
23.8 23.5 21.6
20 16.4 15.6 14.6 5
13.9 AGA equity
2.0
Forward P/E ratio fund
0 0 relative
-1.0 -1.0 -1.0 weight (%)
-20 -4.0 -4.0 -5
-5.0
-7.0 -7.0
-40 -10
-60 -15
Information Healthcare Communication Utilities Industrials Consumer Consumer Real Estate Energy Financials Materials
Tech Services Discretionary Staples
Source: Factset, Allan Gray 31 December 2020
5 17IN SUMMARY
Being right long term usually requires looking wrong in the short term
Today many things that look right in the short term come with major
valuation risk
For those that can take a different tack and be patient, we believe the
potential for outperformance is significant
18About this presentation
Objective of To provide you with some key high level information about Allan Gray, it’s investment philosophy and the Allan Gray Australia Equity Fund (Fund).
presentation
Please don’t take this presentation as an offer to sell or a recommendation that you should invest in the Fund. Before making an investment
decision, please read the Fund’s Product Disclosure Statement and Information Booklet (together PDS). The PDS is available from
www.allangray.com.au free of charge.
Issuer of units Equity Trustees Limited, AFSL No. 240975
Investment Manager Allan Gray Australia Pty Ltd, AFSL No. 298487
Investors The Fund is a managed investment scheme registered under the Corporations Act 2001. It is open to Australian investors. The Fund may also be
offered to New Zealand investors under Subpart 6 of Part 9 of the Financial Markets Conduct Act 2013.
No personal advice This presentation only provides general information or advice. It does not take into account any investor’s personal financial circumstances,
objectives or needs. Please read Allan Gray’s Financial Services Guide if you are interested in the benefits Allan Gray is entitled to receive as an AFS
licensee. The FSG is available from www.allangray.com.au.
Risks There are risks with any investment, including one in the Fund. Please read the risk section of the PDS for more details.
Performance Past performance is not a reliable indicator of future performance and the value of any investment in the Fund is not guaranteed.
information
Economic, market, Such information is provided to indicate reasons for our investment decisions or represents our views on certain matters and based on certain
index or stock assumptions and proprietary analysis. It is not intended to be personal financial advice. You should not rely on our commentary to make any
commentary investment decision. This is because our views can and do change over time, or may turn out to be incorrect.
Other Finally, please seek professional advice, if necessary. We have tried to ensure the information in this presentation is accurate in all material respects
but cannot provide any guarantee that it is.
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