Allan Gray’s holdings show promise and it’s unfazed by AMP share loss

Allan Gray sold its AMP stake at a loss but it is bullish about its ‘uncomfortable’ holdings despite the challenging equity outlook.

Allan Gray managing director Simon Mawhinney.

Fresh from selling a chunk of its position in AMP at a loss, fund manager Allan Gray says its portfolio of “uncomfortable” holdings has good prospects in an otherwise challenging outlook for equities.

The contrarian long-term fund manager, which controls about $10bn for retail and institutional investors, has outperformed its benchmark on its Australian equity fund for the one year, three year, 10-year and 15-year time horizons.

The outperformance only excludes the five years time horizon, when it returned 7 per cent annually while the ASX 300 Accumulation Index gained 8.2 per cent.

In the past year it sold between 20 and 30 per cent of its AMP holdings, crystallising a big loss after building its position in 2019 when shares traded above $2 each, Allan Gray managing director Simon Mawhinney told The Australian on Friday.

Back then, the fund manager hoped a recovery wouldn’t be far off after AMP had already lost close to two thirds of its value in the aftermath of damaging revelations at a royal commission.

“I think it’s important to recognise when mistakes are made and then learn from them. In AMP’s case, we made a mistake,” he said.

AMP shares currently trade at just above $1 each.

Mr Mawhinney said the fund still owned 5.5 per cent of the wealth manager – representing less than 2 per cent of its portfolio – “for a reason”.

“We think we’ll do well from it from this point onwards. That’s not to say that it has been a good investment up until now. We are never going to get our original investment back in AMP,” he said.

By the same token, investments in energy companies built through the Covid-19 period had delivered windfalls for the firm. In the past year it sold stakes in Woodside Energy, Origin Energy and Whitehaven Coal, locking in large gains for its Australian equity fund.

He said the fund had enough capital to be able to take advantage of dislocated markets amid weak growth, high inflation and interest rates.

“The backdrop for broader stock market returns from here is not great. At best, we’re going to see modest returns over the next 10 years,” he said.

“If we want to deliver good returns we have to position the portfolio very differently to this potentially expensive stock market (but) this backdrop should be very good for contrarian investing.”

The firm told investors this week that its portfolio of undervalued stocks was “depressed in terms of price, relative to the stock market” but the opportunity was big because it had bought at cheap prices relative to what it estimates their fundamental value to be.

Its large conviction calls in companies like troubled services provider Downer EDI and property developer Lendlease could deliver good returns if they are turned around.

Mr Mawhinney explained the method in the fund’s “madness” saying it had bought a 6 per cent stake in debt-laden Downer on the thesis it could achieve its earnings targets, and if that happened “Downer is an incredibly cheap company.”

He acknowledged things could get worse for the company, which lost its CFO and chairman after revelations it misreported revenue, and it slashed its earnings guidance at its half-year results, but there was upside and options to achieve it.

“If the current management team can’t fix these things, then we can get a different management team to do (it),” he said. “Our view is the businesses has a future, they are needed.”

The fund, which doesn‘t charge a base management fee and only performance fees in some products, said it had also bought a stake in Virgin Money to take advantage of a depressed price following the Silicon Valley Bank debacle in the US, which hurt financial stocks.

Another “uncomfortable” investment was its bet on the turnaround of construction company Lendlease.

“It’s part of our philosophy and probably reflects how some of us are wired. At each turn it feels like you are buying very cheap companies (and) we think we are doing the right thing with a long-term perspective in mind,” Mr Mawhinney said.

“The vast majority of the companies in our portfolio are cyclically impacted rather than structurally impaired.”

It has exposure to the materials and energy sectors and in the past year had also bought stakes in Fletcher Building, QBE Insurance and Insurance Australia Group.

It is not investing in healthcare companies because they are not considered cheap enough, and is also not too keen on consumer discretionary shares.

The Allan Gray Australia Balanced fund achieved 5.6 per cent in the past year – partly helped by a relatively large exposure to gold, while its custom-made composite benchmark achieved 4.6 per cent over the same period.

Its “Stable” fund returned 3.3 per cent over the past year.

“The opportunity of a lifetime happened in 2020,” Mr Mawhinney said. “It has come down a bit now, but I think it is still an amazing opportunity (for contrarian investors).”