Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
The trick to value investing is more fundamental than you think
As an investment style, value can often be seen as somewhat complicated. If finding growth companies with attractive forward projections is an art, then picking value companies by identifying nuance in price displacement could be characterised as fine art.
And while identifying value in stock markets is indeed a highly complex exercise, it does have some homogenous, fundamental characteristics.
At Orbis Investments, the complexity required to pull off value investing can be distilled down to a couple of simple core elements. “Ultimately, two things matter for our relative performance,” the group noted in a recent missive. “What we own, and what we don’t.”
Taking a contrary view to markets and identifying price displacement essentially means identifying companies that trade at a substantial discount to their underlying value. Executing that directive, however, can transpire in a number of ways, including “…a stock suffering a spate of short-term setbacks, an industry priced as if a down cycle will last forever, a company trading for less than the value of its parts, or a quality business whose growth is underappreciated.”
Fortunately for value investors, the current market dynamic presents a swag of opportunities. While the ‘Magnificent Seven’ big tech stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) dominate headlines in the US and around the globe, underappreciated and mispriced companies are developing as ripe for investment. As Orbis notes, “some cheap companies aren’t junk and some great companies aren’t expensive”.
In the former group sit a lot of companies that may not be as exciting as an Nvidia or Meta, and some that have been scorned by the market altogether because the consensus is that that don’t have the ability to create real investor value.
“These include well-run holding companies like Jardine Matheson in Hong Kong,” Orbis explains. “With subsidiaries offering exposure to consumers across Asia, Jardine has grown earnings and book value per share by 10 per cent p.a. over the long term. Yet because part of its business is in China, Jardine’s shares have languished. It now trades for less than half its book value and at six times our estimates of earnings, with a dividend yield above 5 per cent.”
*Read Orbis Investments’ whitepaper ‘Sunrise on Venus: Investing for the Next Decade’ here.
Other examples of these underappreciated companies include Korean banks like KB Financial and Shinhan Financial, or Japanese financial services providers like Sumitomo Mitsui.
In the latter group of companies whose valuations don’t reflect their potential sit firms like Japanese gaming firm Nintendo.
“The company owns some of the world’s most valuable intellectual property, but has historically been conservative in making money from it,” Orbis notes. “Trading at just above 20 times earnings, Nintendo’s valuation is near the average for world stock markets, but we believe its prospects are far better.”
These companies may not be dominating the market, but the key factor is that their forward value is underappreciated. The US has plenty of them as well, Orbis says, including a host of healthcare and financial services companies that are trading at a discount.
None of these companies are without risk, of course. But that’s where finding a reputable and fund manager with the expertise required to pick more winners than losers comes into play.
And depending on which way you look at things (and how they perform), an investor could even categorise these companies as growth. But that’s not important, Orbis believes. What matters is rewarding savvy, long-term investors with returns that meet their objectives.
