It’s been a difficult decade for value investors, yet the Orbis Global Balanced Standard fund has been able to hold its grounds in an environment unfavourable to its investing style.
Over 10 years, it is the second best performer in the IA Mixed Investment 40-85% Shares sector and since current manager Alec Cutler took the reins in 2014 the fund has maintained its good performance, achieving top-quartile performance over several periods.
Here, Cutler discusses the fund’s exposure to gold, why he believes inflation is here to stay and why there is a need for environmental, social and governance (ESG) investing 2.0.
Performance of the fund since Cutler’s appointment
Source: FE Analytics
Can you explain your investment process in a few sentences?
We are long-term, fundamental-intrinsic, value investors. Some people might call us contrarians, but the important bit is that we can invest if the valuation is low enough.
In the markets nowadays, the aggregate of all investors is very short term. We try to take advantage of that and invest on a three-to-five-year horizon.
Why should investors have your fund in their portfolio?
We can invest across all asset classes and we do so with an intrinsic value approach. There aren't many global balanced funds that use that type of approach.
We also apply a style that has been out of favour for 14 years. A lot of balanced funds are more growth oriented or low duration than we are. We go where everyone isn't and decide what we should own from that.
The fund has a sizeable exposure to gold (10% either in gold or gold mining businesses). Why is that?
We first bought gold in 2018 because all the gold miners looked like they were going out of business. If suppliers are going away, then you want to own the commodity itself, but we also bought some of the gold miners that we thought would survive.
Since that time, there’s been a nice supply-demand situation. In an environment where we don't know where inflation is going to be and with the risk of currencies getting inflated away through money printing, it's been really nice to have a portion of the portfolio in the only hard currency.
I enjoy watching people poking at our gold position and saying ‘the US Dollar outperformed gold over the last whatever amount of time’. Well, gold has outperformed everything over 6,000 years.
Have you made any change in the portfolio in that period of time?
We made changes in the energy sector. We haven't reduced the exposure to energy too much, we've just made a lot of changes.
We took out a lot of the oil exposure and replaced it with liquified natural gas and infrastructure, with names such as Kinder Morgan and Mastech. I continue to think it's the best risk-reward place to be in energy.
You invest with a five-year time horizon. What is your view for the next half-decade?
We think it's going to be good to be in lower duration, higher yielding securities, because we don't believe that inflation is going away.
If you look at the long-term trends, interest rates have been going down since 1981. Labour has been getting weaker since 1981, with Reagan firing air traffic controllers in the US and Margaret Thatcher beating the coal miners in the UK. The Berlin Wall fell in 1989 and we've had a peace dividend since then.
Intel and Microsoft came to the fore in 1995 and started the 10 years of growth of the internet. China joined the World Trade Organization in 2001, sparking a massive offshoring move. Those were all inflationary depressants.
But all of those things have reversed in the past year or two in full force. They've all shifted into being inflationary tailwinds.
You also have the war on carbon, which is probably the biggest of them all. I read an article recently that said the war on carbon, which effectively means electrifying everything, is not going to be inflationary because the government is going to subsidise it. That is just an absolutely crazy thing for me to hear. Governments subside it by printing money. That creates inflation too.
We just don't see how that's possible that we will return to an environment with a 2% inflation rate. That 2% figure was built off all these positive impulses. Now, all those impulses are in reverse and act as negative impulses.
What are your views on ESG?
We're big believers in responsible investing. That's what we've been doing since the firm was founded. Doing the right thing for society is very aligned with doing the right thing for producing returns, and finding businesses that are going to go up and not down. But we don't ascribe to any acronym.
Our biggest thought on the ESG movement is that, to date, we’ve had what we could call ESG 1.0. We need to come up with ESG 2.0 that would be more inclusive, not just of the developing world, but also of those that are deemed to be evil in the ESG mind, like energy producers and carbon emitters. You're not going to solve the carbon issue without talking to them.
Just saying ‘you're not allowed to come to the COP or whatever conference because you're an oil company’ is just the dumbest thing I've ever heard. Until you get all the smartest people in the room, not just the not just the environmentalists who really know their stuff and are very credible, but also the petroleum engineers, the geologists, the chemists, etc, you're not going to get anywhere. You're not going to have any real long-term solutions and it's going to fall on its face and then we're going to be worse off.
How did you get into fund management and what do you do outside of it?
My grandmother taught me how to invest as a kid, so I always wanted to get into that. As for what I do outside of fund management, I'm going to say: not much. This is my passion, so I don't really do much else. It's a 24/7 pursuit.