Commentary by Simon Mawhinney, Managing Director and Chief Investment Officer
It has been a disappointing year for the relative performance of the Allan Gray Australia Equity strategy. It is tempting to point to stock-specific reasons for this underperformance, but our largest detractor from performance (Alumina) was mostly offset by our largest contributor (Newcrest Mining / Newmont). Our underperformance this year is not because of the performance of our outliers. It is instead due to significant trending or momentum in areas of the market in which we are underrepresented.
We’ve been here before
We first wrote about being on the wrong side of momentum and trending share markets in our September 2015 Quarterly Commentary and then again in December 2021.
In the lead-up to late-2015, companies with defensive earnings characteristics were all the rage. Market participants bought these companies aggressively and sold cyclically-exposed companies to fund these acquisitions, which led to significant relative price dislocations. By late-2021, it was all about sexy disruptors and high-quality companies, with the boring old-world companies being used as the funding vehicles. Investing against these trends later proved very rewarding for investors. Today, size and liquidity appear to be major beneficiaries of the market’s trending, with large, liquid companies leading the field funded by the sale of smaller, less-liquid companies.
Graph 1 shows the..