Interview 025_Brett Moshal
May 02, 2016
byInvestment in Japan
Company: Orbis Investment Management Limited
Brett Moshal leads Orbis’ Japan equity research team, where he conducts independent fundamental research and recommends Japanese shares for the Orbis Equity Strategies. Brett holds Bachelor degrees in Commerce and Accountancy from the University of the Witwatersrand, as well as Chartered Accountant and Chartered Financial Analyst designations. Prior to joining Orbis in 2003, Brett had experience at Arthur Andersen, Standard Corporate and Merchant Bank, and Brait.
Q1.Please describe your investment philosophy and how you invest.
Our philosophy is to buy shares at a deep discount to what we think they are worth. What I really like is asymmetric opportunities where the downside is much less than the upside, typically because there is a high margin of safety. Of course, if everyone else thinks a stock is going to double, it’s not likely to trade at a discount! So I like to be in depressed areas and depressed stocks where we are more likely to find undervalued companies. We typically look for well-run companies that are going through a temporary problem that the consensus deems to be permanent. Most of the time the consensus view is correct but if we turn over enough stones, eventually we expect to find a gem. Once we find an idea that looks compelling, we conduct extensive research on the company’s fundamentals to develop conviction in our thesis. If a stock is attractive enough to warrant a place our clients’ portfolios, we are prepared to be patient and invest for the long-term.even if our analysis is right, it may take years for the thesis to play out and the share price to reflect the value we see in the company.
Q2.Please describe your team structure.
I lead the Japan research team, which has six equity analysts. We’re based in London, which at first glance is probably not the obvious choice for Japanese equity research. But we haven’t had a Tokyo research office historically, and that hasn’t stopped us from delivering substantial outperformance for our clients. If anything, we view being based in London as an advantage.it insulates us from market noise, and we’ve found that London offers very good access to management teams. In Japan, a company president may be less willing to spend time with investors 1:1 because they have other work to do. But when they come to London, meeting with investors is their focus, and as one of the largest active managers of Japanese equities in Europe, they’re happy to spend time with us. Of course, we also spend extensive time travelling to Japan in order to meet with companies, particularly those management teams that don’t visit London. Because we hold a very concentrated portfolio of around thirty stocks, we tend to be high up on the shareholder register and that has helped open doors to senior management.
Within Orbis, our equity analysts work in a “matrix” of small research teams focused on regions or global sectors. For many shares, we can draw on the views of both a local generalist from our Japan research team and a sector specialist from our global sector research team. This matrix structure is especially helpful for a company like INPEX, Japan’s only major oil and gas company. An important step in our research process is a meeting where knowledgeable analysts interrogate the thesis for a stock. For a stock like INPEX, our energy specialists would attend that meeting, and could bring substantial industry knowledge to help us test our thesis. This allows us to invest with a greater degree of conviction than we would be able to develop otherwise.
Q3.Please let us know where you find investment opportunities today.
In our view, discounts to intrinsic value can arise in a number of ways, so the traditional style boxes like “growth” and “value” don’t tend to capture our approach very well. We invest in both “growth” and “value” shares, and the mix depends on the opportunities the market offers us. As it stands today, we have more of the value names in the portfolio. Growth stocks are expensive relative to where they’ve traded in the past, so we have found relatively few new ideas in this area. Our top winners in the past few years have been growth names such as Obic, Park24 and HIS, and we have sold those as we feel they no longer trade at a sufficient discount to our assessment of intrinsic value.
A good example of the type of value names we favour now would be the general trading houses (or sogo shosha) Mitsubishi and Sumitomo.
Sumitomo trades at a very inexpensive valuation. It had a massive non-cash write-off on a number of investments last year that spooked the market. Mitsubishi is a little more expensive but in our view still a bargain. With trading companies, opaque accounting can be an issue, but you have to compare what you’re paying for with what you’re getting. In client meetings, we show charts of Japanese food and pharmaceutical companies trading at 40-100 times earnings with returns on equity of 5-10% and then we show Sumitomo and Mitsubishi which trade at ~10 times earnings and less than book value, with returns on equity of ~10%. Their accounts are opaque, but does that lead you to buy the pharmaceutical company which is ten times more expensive? In our view, no.we aim to keep our clients’ capital invested in stocks that trade at a discount to intrinsic value.
Q4.How best would you protect clients’ assets?
We define risk as the permanent loss of capital rather than price volatility or the risk of underperforming the benchmark over the short term. In many cases, the risk of permanent capital loss results from overpaying for shares, which leads naturally to disappointing long-term returns. As I mentioned, we try to invest in undervalued companies, and we believe this provides an important first line of defence against the risk of loss.
But with this value-oriented approach, we have to be vigilant about avoiding value traps.companies that look cheap but don’t have the fundamental strength to drive good returns for shareholders. We deal with this on a case by case basis. Does the company earn an adequate cross-cycle return on invested capital? Is the company’s balance sheet appropriate? Are they going to dilute shareholders by raising equity capital? We try to avoid these errors by looking closely at a company’s long-term history and evaluating its management team.
Q5.What are your core beliefs as an investor? What would you never do? What are you trying to achieve?
One thing that must override everything else is that the stock has to trade at a deep discount to intrinsic value. For example, Fast Retailing (Uniqlo) is a great business, but you pay big money for it.about 40 times earnings. All investing involves an element of risk, but one thing we never want to do is overpay for an investment.
I say to my analysts that you do not need a shopping list of reasons why you like a stock, just two or three. With your ideal stock you could try to tick every box, but you are never going to find that stock. Instead you have to weigh all these factors, and invest only where you have conviction.
That conviction is important, because if you are trying to beat the market, you must be different to the market, and this can leave you looking really foolish from time to time. Without conviction and the right incentives in place, it can be tough to stick with promising long-term investments through periods of short-term underperformance. The research process is designed to help our analysts build conviction, and our firm structure incentivises us to do what is best for clients. Our analysts are paid chiefly based on the performance of their stock recommendations, and at the firm level, all of our fees are performance based.
Ultimately we are trying to deliver superior long-term returns for our clients. If our clients are doing well, we
can too, but our structure ensures that we can never prosper at our clients’ expense. In our view, this is exactly how it should be.
•This article originally appeared on May 2, 2016. Any views presented in this article are as of such date and are subject to change.
•This article and the information provided therein are not a recommendation to purchase or sell any security, nor are they intended to constitute the marketing of, or a solicitation for investment in, any investment product.