Periods of underperformance are stressful and disappointing, and while they are an expected part of the investment cycle for us as a contrarian manager, we appreciate that they can be painful. The Orbis investment team, however, has been in this position before, continues to focus on the long term, and is optimistic about the current value and potential in the Orbis Funds.
Orbis and Allan Gray’s ability to deliver on our objective of creating long-term wealth for clients depends on whether we are able to help clients understand our process and remain committed to the long term. For this reason, we want to share our analysis on the year-to-date performance for the Orbis Funds. We would not ordinarily comment on such a short period, however, given that it has occurred after a disappointing period of underperformance during 2018, we felt it might be useful for clients to understand the drivers. For a more detailed look at the 2018 performance, please see Quarterly Commentary 4, 2018.
In the first two months of 2019, the Orbis Global Equity Fund has returned 5.6% after fees, underperforming the FTSE World Index which returned 10.8%. Stock selection has been responsible for the bulk of the underperformance, and has been heavily influenced by the top-three underperformers. XPO Logistics, a US-based provider of transportation and logistics services, biopharmaceutical company AbbVie and Chinese technology company NetEase together detracted approximately 4.0% from the relative performance in the Orbis Global Equity Fund. However, our investment conviction in these three companies remains the same and each continued to be among our largest holdings in Orbis Global Equity Fund at the end of February.
XPO Logistics detracted approximately 1.1% from relative returns, largely due to a sell-off in mid-February after the company reported disappointing results and lowered its 2019 guidance for the second time in two months. The stock price fell by approximately 13% in response to this news. These results are disappointing and fundamentals could get worse before they get better, but we believe the challenges XPO currently faces are likely to be temporary. Despite these challenges, XPO still managed to grow earnings before interest, tax, depreciation and amortisation (EBITDA) organically at a mid-teens rate in 2018 and should still achieve mid-to-high-single digit organic growth in 2019. We are further encouraged by the company’s decision to buy back more shares well below intrinsic value, as this effectively leaves us owning a bigger share of a company which we find very attractive— without us having to invest a single additional cent.
AbbVie detracted approximately 1.4%. The most pronounced underperformance followed the company’s results release in late January, which disappointed the market, but did not change our thesis or estimate of intrinsic value. We remain enthusiastic about the potential for AbbVie’s drug pipeline to deliver blockbuster new assets, particularly within immunology. We have added modestly to the position in recent months while recognising that there is no immediate catalyst for a share price rebound.
NetEase detracted approximately 1.4%. The company’s most recent results were in line with consensus expectations, but its failure to beat on revenues, and commentary around competition in ecommerce, left the market pessimistic. Our estimate of intrinsic value has not changed, and we continue to believe the shares can roughly double over our long-term investment horizon.
The year-to-date underperformance in the Orbis Global Balanced Fund has been driven by the same shares, albeit to a lesser degree as the positions sizes are smaller. In total the underperformance of the XPO, AbbVie and NetEase shares detracted approximately 2.0% from the Orbis Global Balanced Fund’s relative returns versus its 60/40 benchmark.
The Orbis Optimal SA Fund, which is designed to capture Orbis’ stock-picking ability, has delivered negative returns of -1.6%, while US$ cash deposits returned 0.4%. While stock picking delivered positive results in some regions, it was not enough to offset the underperformance of the US and emerging market stocks, which in total detracted approximately 3.2% from the Orbis Optimal SA Fund’s returns.
Naturally, clients may be wondering whether there have been any fundamental changes in our investment approach. Orbis and Allan Gray remain disciplined and continue to apply the same investment philosophy and process as we have done historically. This is important and has typically been rewarding in the years which have followed.
We know that, because we invest differently, our Funds’ performance can differ significantly from the benchmark – and we appreciate that this can be uncomfortable for clients. While we cannot predict when our performance will turn, our focus remains intensely on finding opportunities that will deliver solid returns over the long term with a lower risk of permanent capital loss.
Looking at the Orbis Funds today, the portfolios hold an above-average collection of companies which, in our view, trade at prices far below their intrinsic values. As a result, we remain enthusiastic about the investments we have made on your behalf.