Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2015
BCI Conference
Seema Dala
20 May 2015
Allan Gray Proprietary Limited is an authorised financial services provider. 2
Japan government 10-year bond yield
Source: Igraph, Ian's area IWM
Allan Gray Proprietary Limited is an authorised financial services provider. 3
Maybe Japan is not so unusual?
Source: Igraph, Ian's area IWM
Allan Gray Proprietary Limited is an authorised financial services provider. 4
Risk vs Return: The Theory
Risk
Retu
rn
Allan Gray Proprietary Limited is an authorised financial services provider. 5
Risk vs Return: The Theory
Risk
Retu
rn
Allan Gray Proprietary Limited is an authorised financial services provider. 6
Risk vs Return: The Practice E
xp
ecte
d
Re
turn
Perceived Risk Source: The Most Important Thing, Howard Marks, 2011 (modified)
Allan Gray Proprietary Limited is an authorised financial services provider. 7
Standard and Poor’s 500 index inflation - Adjusted
Source: Ned Davis Research (RH 110515)
(DAVIS113A)
Monthly Data 12/31/1880 - 3/31/2015 (Log Scale)
S&P 500 Index (Inflation Adjusted)
Gain/Annum When:
S&P 500 to P/E Gain/ %
in Bottom Clip is: Annum of Time
* Above 16 0. 7 50. 3
Between 13.5 and 16 1. 2 15. 7
Below 13.5 4. 3 34. 0
Source: (c)International Center for Finance at Yale School of Management Data Source: Robert J.Shiller, Irrational Exuberance 68
83
101
123
150
183
223
271
330
401
488
593
721
877
1067
1297
1578
1918
68
83
101
123
150
183
223
271
330
401
488
593
721
877
1067
1297
1578
1918
Me
an
+1
SD
+
2 S
D
+3
SD
+
4 S
D
-1 S
D
Da
sh
ed
Lin
es =
Std
De
v
(c)International Center for Finance at Yale School of Management Data Source: Robert Shiller,Irrational Exuberance4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
42
44
4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
42
44
Standard and Poor's 500 Index Inflation-Adjusted
S&P 500 Index / 10-Year Avg EPS Inflation-Adjusted
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
. www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Allan Gray Proprietary Limited is an authorised financial services provider. 8
Does a 0.1% bond yield mean we should pay P/E 1000 for stocks?
Source: Minack Advisors
Allan Gray Proprietary Limited is an authorised financial services provider. 9
31 March 2015
(8%)
(4%)
0%
4%
8%
12%
16%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Degree of trending in the FTSE World Index
TMT bubble
This chart shows the degree of “trending” in the FTSE World Index. At each point in time, we rank the stocks in the index on their performance in both the trailing 12-
month period and the 12-month period before that. We then calculated a statistical measure of correlation (Spearman’s Rank Correlation) between those two ranks at
each point in time. Because the data is highly volatile in the short term, we smoothed the results using a four-year rolling average to reflect the degree of trending over
the medium term.
The challenging environment of the past five years
Source: Orbis
Degree of trending in the global stockmarket
Allan Gray Proprietary Limited is an authorised financial services provider. 10
31 March 2015
(40%)
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Three-year subsequent relative return (RHS)
Relative attractiveness (LHS)
More
attra
ctiv
e H
igher su
bseq
uen
t relative retu
rn
Japan bubble
TMT bubble
Global laggards look unusually attractive
Relative attractiveness and three-year subsequent relative return of laggards in global markets
Source: Orbis
Allan Gray Proprietary Limited is an authorised financial services provider. 11
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1974 1979 1984 1989 1994 1999 2004 2009 2014
S&P500
Energy Sector
31 December 2014
Ratio of invested capital to enterprise value for Energy shares and the S&P 500, equal-weighted, 1974 through 2014
We are no better positioned to predict the yearly swings in the price of oil today than we were heading into 2014, but our assessment of the industry’s long-term
fundamentals and the intrinsic value of the Fund’s holdings had not changed meaningfully at 31 December 2014. What has changed is the price at which the market is
valuing these energy shares, and we have taken the opportunity to add to some existing positions at wider discounts to our assessment of intrinsic value. In addition,
we are finding good reason to research a number of new opportunities in the sector. As shown in the chart, US Energy shares look more attractive today on a headline
valuation basis versus the wider US market than they have for quite some time.
This analysis was taken from the Orbis quarterly investment commentaries. More details can be found in the 31 December 2014 Quarterly Reports for the Orbis Equity
Funds.
Ra
tio
of
inve
ste
d c
ap
ita
l to
en
terp
ris
e v
alu
e
Less e
xp
en
siv
e
Source: Datastream and
Orbis.
Energy Share Valuations Have Diverged From Those of the US
Market
Allan Gray Proprietary Limited is an authorised financial services provider. 12
Taiwan
ChinaMalaysia
Philippines
Singapore
India
Indonesia
Korea
Thailand
Asia ex-Japan
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
7.5 10.0 12.5 15.0 17.5 20.0 22.5
Payout ratio indicated by
diameter of circle
20% =
31 December 2014
Price-to-book value, price to earnings, and payout ratios of Asia ex-Japan markets, as at 31 December 2014
As shown above, Korea remained the cheapest stockmarket in Asia on a price-to-book basis at the end of 2014, but the bear view is that it is deservedly so. With low
earnings growth, low dividend payouts and poor corporate governance plaguing many companies, many investors would argue that Korean shares are a classic value trap
rather than an undervalued opportunity. We do not take a contrarian view on Korea just for the sake of it; nor do we invest in “Korea” as a whole. Instead, as a result of our
bottom-up research, we found ourselves excited about a number of Korean shares at the end of 2014.
This analysis was taken from the Orbis quarterly investment commentaries. More details can be found in the 31 December 2014 Quarterly Reports for the Orbis Equity
Funds.
Pri
ce-t
o-b
oo
k v
alu
e
Price to earnings
Source: Datastream and
Orbis.
Korea is Cheaper Than Other Asia ex-Japan Markets, With Lower
Shareholder Payouts
Allan Gray Proprietary Limited is an authorised financial services provider. 13
Our most important actions are our portfolio decisions 31 March 2014
China 5.8%
NetEase
Korea 4.9% Samsung
Electronics
2.3% KB Financial
Group
Russia 2.1%
Gazprom
United States 5.3% Motorola
Solutions
3.7% QUALCOMM
3.4% eBay
3.1% Apache
2.6% Microsoft
2.1% Liberty Global
Key overweight markets
Key underweight markets Normalise
d
P/E
Trailing
P/E
Current /
historical
P/E
Current /
historical
margins
Historical
revenue
growth
Orbis Global
Equity Fund 16x 18x 1.2 0.9 7%
FTSE World
Index 24x 20x 1.3 1.1 4%
Allan Gray Proprietary Limited is an authorised financial services provider. 14
Legal notes
Copyright
The content and information provided are owned by Allan Gray Proprietary Limited ("Allan Gray") and are protected by
copyright and other intellectual property laws. All rights not expressly granted are reserved. The content and information
may not be reproduced or distributed without the prior written consent of Allan Gray.
Information and content
The content of this presentation is provided by Allan Gray as general information about the company and its products and
services. Allan Gray does not guarantee the suitability or potential value of any information or particular investment
source.
The information provided is not intended nor does it constitute financial, tax, legal, investment, or other advice. Before
making any decision or taking any action regarding your finances, you should consult a licensed financial adviser.
Nothing contained in the presentation constitutes a solicitation, recommendation, endorsement or offer by Allan Gray, but
shall merely be deemed to be an invitation to do business.
Disclaimer
Allan Gray has taken and will continue to take care that all information provided, in so far as this is under its control, is true
and correct. However, Allan Gray shall not be responsible for and therefore disclaims any liability for any loss, liability,
damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or
which may be attributable, directly or indirectly, to the use of or reliance upon any information provided.