More value abroad than locally
THE usual arguments prevail in favour of investing offshore - risk mitigation through diversification and finding the value in a far wider pool of companies – but tipping the scales at the moment is the fact that the JSE, with average valuations of 18.2 times earnings, is “very expensive” for the limited number of companies you can access, says Seema Dala, an analyst at Allan Gray who heads up Orbis client servicing in South Africa.
“We’re currently not finding much value in the local market. But when you move into a global universe of almost 6,000 investable companies operating in sectors not easily accessible in our small, concentrated market, it becomes much easier to find mispriced companies. It’s a big world out there and there are varying levels of valuation between different geographies and industry sectors,” she explains.
Despite the run on various developed markets recently, Dala says Allan Gray’s offshore partner Orbis is still finding a rich vein of value in stocks listed in traditional markets like the US, particularly in the technology sector, including Motorola, Microsoft and eBay. These are companies with a long track record, but which have a proven ability to withstand varying economic cycles. And if such obvious companies offer value there are also many less well known tech companies, especially in China.
“The Orbis Global Equity Fund has a 24 percent exposure to Asia ex-Japan equities, mostly in Korea. This is a region that has under-performed in recent years – when stocks fall so much it creates a lot of opportunities.
“A substantial 4.8 percent of the Fund’s exposure is to Samsung, which has evolved to become one of the world’s largest competitors to Apple, and is extremely well run. The largest stock in the Global Equity Fund is Chinese internet technology company NetEase, which competes head-on with Tencent as one of the largest online game operators in China, with the largest email service and third largest portal.
“It has maintained its market share despite the strong growth of Tencent – and we have identified a few such Chinese tech companies that are benefiting from the trend of increased internet usage in China,” says Dala.
The economic uncertainty in the European Union (EU) is also revealing opportunities. The Orbis Global Balanced Fund, which was launched two years ago in order to meet clients’ need for a fund that balances capital appreciation and income generation against risk, has a third of its Fund invested in the region.
“The strategy of the Orbis Global Balanced Fund is to look at companies with a slightly different lens, preferring attractively-priced companies with more sustainable operating models, stable cash flows and attractive dividend yields. The Fund has found some interesting stocks in the EU that meet these criteria.
“For example, Mitie Group PLC is a leading UK provider of outsourcing services, and is one of the largest facilities management providers in the region. The company offers an attractive combination of long-term growth potential and ample income, and its solid track record of quality execution provides a decent competitive moat.
“It is available at a four percent dividend yield and around ten times our estimate of future earnings, making it an attractive investment.”
Dala believes the US market is in expensive territory, notwithstanding which Orbis has 44 percent of its portfolio in that market. “There remain excellent value opportunities, but we’re cautious.
“The S&P has only ever been more expensive than it is now twice before: just before the 2000/1 Tech Bubble and just before the start of the Great Depression. When investing in the S&P at this level, investors have never previously had a positive return over the subsequent five-year period,” she warns.
Orbis is under-weight the yen (six percent compared to its World Index benchmark’s nine percent) but in terms of stocks is equal.
Allan Gray’s feeder funds are currently closed to local discretionary investors due to lack of capacity, explains Dala. “However, investing directly into Orbis remains an option for those with their offshore allowance available.”
“The increase in the annual offshore allowance from R4m to R10m (with a limit of R20m a family) has had no significant impact on offshore flows. The trigger for such offshore flows regrettably tends to be an emotional response to weakening of the rand,” she says.