The Fund is a feeder fund and invests only in the Orbis SICAV Global Balanced Fund (‘Orbis Global Balanced’), managed by Allan Gray’s offshore investment partner, Orbis Investment Management Limited. Orbis Global Balanced invests in a diversified global portfolio of equities, fixed income, and commodity-linked instruments. The typical net equity exposure of Orbis Global Balanced is between 40% and 75%. Orbis Global Balanced aims to balance investment returns and risk of loss. Returns are likely to be less volatile than those of a global equity-only fund. Although Orbis Global Balanced’s investment universe is global, the units of the Fund are priced and traded daily in rands

It has been quite a ride. Coming into COVID-19, the Fund was positioned well for continued economic activity. That, of course, is the opposite of what happened, and the Fund suffered along with the market in the initial crash. At that time, the best thing we could do was dedicate ourselves to taking advantage of the opportunities to upgrade the Fund’s upside and quality so that it could outperform in the recovery.

That’s what we did, and the Fund outperformed significantly from the March 2020 lows. By the end of May 2021, when the Delta variant was first named, the Fund had recovered all of its underperformance from the initial COVID-19 crash and then some. With the emergence of new variants since then, popular trends of the past decade have re-emerged – low bond yields, a preference for virtual businesses, and a strong US dollar and stock market. Those have weighed on performance, undoing the Fund’s outperformance in the first half of 2021.

As a competitor, I am frustrated by the performance, but as an analyst, I’m more excited
about the portfolio than I was a year ago. The businesses we invest in are performing
well for us, but for many, their stock prices are not. While in other parts of the market, less
profitable or outright money-losing businesses are attracting increasingly bubbly prices.
As a result, the gradient between the bubbly stocks and the other three-quarters or so
of the market is the most extreme I’ve seen in my 35 years of professional investing.
That is nirvana for a valuation-focused stockpicker. So as managers of meme-friendly
funds feel emboldened to dismiss contrarians as dinosaurs and valuations as a chump’s
pursuit, we remain committed to and excited about our approach. The most difficult
times, as a contrarian, are created when market momentum around a certain group
of stocks goes far enough for long enough that we eventually rotate out of the things
that have done well into opportunities that are fundamentally more attractive. This
usually works well, as momentum typically has a short shelf life, but every once in a
while, trends persist to the point of notable extremes. One feature of the recent market
momentum regime has been the seeking out of companies that don’t have to invest
much in physical plant and equipment to produce earnings. An Apple or a Microsoft or
a Google doesn’t have to buy a lot of plant and equipment to run their business. They’ve
been called virtual companies.

Because virtual companies have so captivated investors, it’s become almost religion that you don’t own the opposite – you don’t own companies that have to invest a lot in capital expenditures to maintain their business. Something like a semiconductor manufacturer sits at this undesirable end of the spectrum, where each plant costs US$15-20 billion and takes five to six years to build, during which time the plant produces no revenues. Similarly, building a copper mine will cost money for years before producing any copper. Same for a polyethylene plant, or a refinery, or a cardboard factory.

These “maker” businesses are perceived as very unattractive and have been punished with very low valuations. Said another way, investors are supplying less capital to businesses that make physical things. The wonderful irony (for us anyway) is that demand for those things is exploding – including from the “virtual” businesses. We are seeing the results. Supply chains are roiled, and many don’t have enough capacity of the basic inputs that these makers make. That’s been caused, in part, by years of shareholders yelling at these companies to stop investing.

So we’ve been able to buy lots of makers, many of which provide support critical to the success of more glamorous companies, at very low prices. The best example is also the largest equity holding in the Fund – Samsung Electronics, the world’s largest maker of memory semiconductors. The company invests a great deal – nearly US$40 billion in the last 12 months alone. But with a long-term return on equity close to 20%, Samsung does make a lot of money on what they invest.

That is the key for us. We share others’ dislike for companies that invest heavily in lowreturn pursuits, but for Samsung that’s not the case. The latest manufacturing method employed by Samsung, called extreme ultraviolet lithography, manipulates light with a precision akin to shooting an arrow at the moon and hitting an apple off a person’s head. Samsung memory enables everyone from Apple to Microsoft to offer their products. Yet, after accounting for the cash on its balance sheet, Samsung trades at just 10 times earnings. We strongly believe that Samsung’s remarkable skill is worth something much closer to 20 times earnings, similar to the multiple afforded the wider stock market today. We think that kind of perception against makers is going to change, and not just for Samsung. The Fund is now dominated by companies that make things that are important to everyday life, including six of the top 10 positions.

The world is coming to realise that it needs Samsung to produce memory chips, and BP and Schlumberger to produce oil and gas. The UK needs Drax to produce electricity, and Japan needs Mitsubishi to produce and import metals, food, and energy. A third of all natural gas in the world is touched by Royal Dutch Shell, and TSMC is probably the most important company on earth, responsible for producing the brains for most of the world’s computers. As that realisation continues to become clearer, we believe each of these companies should be rewarded with materially higher valuations. Over half of the Orbis SICAV Global Balanced Fund today is invested in the equity or debt of companies that we consider “makers”.

Those makers contribute to a portfolio that looks very different from the market as a
whole. In aggregate, the equities in the Fund have lower returns on equity and revenue
growth than the wider market – but the Fund is fully 45% cheaper than the market on a
forward price-earnings basis, and on a free cash flow basis, the discount to the broader
market has never been wider.

We tend to feel best about the portfolio just when we feel worst about performance.
That is a feature, not a bug, of our approach. We intend to stick with it. Being a contrarian
is difficult – until it becomes wonderful.

The largest addition to the Fund during the quarter was a new position in a US energy
infrastructure company, which we believe is trading at a deep discount having weathered
the headwinds that have plagued the oil & gas industry in recent years. Conversely, the
largest sale was a reduction in US pharmaceutical company AbbVie, following a period
of outperformance.