Value investing can be an unrewarding pursuit at times but fund managers at Orbis are sticking to their guns despite markets currently driven by momentum rather than fundamental factors.

This may be part of the reason Orbis boasts a number one peer ranking in the long-term and therefore arguably most important investment time frames, even though more recent performance has lagged.

Contrarian approach

Equity analyst Dan Brocklebank often manages to surprise us with deeply contrarian additions to Orbis’s equity portfolios and today is no different.

The Chartered Financial Analyst is enthusing about JD.com (JD.:NDQ) - not the retailer familiar to many British high streets but a China-based e-commerce outfit listed on the United States’ NASDAQ exchange.

It’s not long since markets were writhing in panic over China’s slowing economy. While some investors ran for the exits, Orbis was patiently buying up stock.

‘In a nutshell, when everyone panicked about China’s growth numbers we bought JD.com at a valuation which we believe is very attractive,’ says Brocklebank.

‘Profits are quite low - but remember Amazon (AZN:NDQ) never really reports serious profits either. JD.com is investing heavily in marketing which is building up a large base of consumers.

‘When you have the kind of scale JD.com possesses, you get some of the most cost efficient marketing spend in the industry with a more loyal customer base.

‘It’s going down the same route as Amazon with a really excellent customer interface.’

Brocklebank stops short of calling JD.com ‘the Amazon of China’, saying it has more similarities with the online market place run by Ebay (EBAY:NDQ).

‘Ebay was far larger than Amazon for a long time and we think JD.com can do better than eBay was able to do around customer service,’ Brocklebank adds.

One of the key weapons for value investors looking to deliver superior performance is to consider a problem from a different angle to the rest of the market. In the case of companies like loss-making JD.com, marketing spend is expensed on a company’s income statement, so reduces a profit.

At the same time, when effectively executed, it dramatically increases a company’s longer term earning power.

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Invest like the best

Think of the hundreds of billions spent by Coca-Cola (KO.NYSE) over the years. Without these expenditures, Coke would have enjoyed much higher short-term profitability in its early days as a public company. But it would be just another Panda Cola today.

This, along with buying opportunities provided by fearful markets, is the kind of opportunity value managers like those at Orbis look to pounce upon.

Still, there is an extra layer of risk in JD.com. China-domiciled stocks - generally smaller ones - have performed terribly on international exchanges around the world. JD.com is larger than many of its compatriots which eventually ran into trouble and Brocklebank believes the risks are mitigated in a number of ways.

‘One protection with JD.com is that - unlike information or culture-related businesses such as online gaming and internet search - foreign ownership is not prohibited in China,’ says Brocklebank. ‘Hence the need for elaborate business structures is lower.’

A dual class share structure is not ideal, Brocklebank concedes, but founder Richard Liu has the vast majority of his own wealth tied to the stock, which may mitigate some of the risk.

‘There are always risks with any stock, which is why we have a portfolio to diversify,’ Brocklebank adds.

Sometimes, contrarian calls can go wrong. Orbis called a recovery on Russian stocks too early, snapping up stakes in national champions Sberbank (SBER:MCX) and Gazprom (GAZP:MCX) in July 2014 as territorial tensions between Russia and Ukraine surfaced.

Brocklebank says the team at Orbis is always looking at the possibility that apparently cheap stocks could represent poor investments if earnings fall away markedly. This helped the fund largely steer clear of commodity investment even as businesses like BHP Billiton (BLT) and Rio Tinto (RIO) traded on big dividend yields and low price-to-earnings (PE) ratios before falling even further.

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Metrics mislead

‘You have to be really careful using mechanistic processes like PE ratios or price-to-book multiples,’ says Brocklebank.

‘You need to ask if the earnings are sustainable. Suddenly, when people realise they are not, the price collapses. You can end up with a stock you thought looked cheap that has actually become a lot more expensive when the earnings fall away.’

Part of the investment process at Orbis is to ask two fundamental questions of any prospective investment:

If you were to own the whole business and it was the only investment you could ever make in your life, what would you be willing to pay for it?

How does the business make money and to what extent is in control of its own destiny?

On point one, Brocklebank argues that if investors don’t consider an investment to be a long-term decision they are playing a game of ‘pass-the-parcel’, hoping that someone else will buy it at a higher price. This doesn’t hold much sway in the Orbis process.

Point two is part of the reason Orbis has a cautious stance towards commodities stocks.

‘If you’re in the business of digging dirt out of the ground then trying to find someone to buy it, you have to ask if that is a good a business to be in,’ says Brocklebank.

‘When you fly over Australia, the entire country is red because it’s full of iron ore. No miner can control the supply that comes onto the market and they have little or no pricing power. It’s really hard to know where commodity prices will be in the future.’

As well as pursuing a value approach to investing, Orbis also aims to provide market-beating value to its investors through a ‘no performance, no fee’ style fee offering.

Performance-related pay

The fund only charges fees to investors if it beats its benchmark, when the charge rises to 50% of any return above that of the MSCI World Index. There is also a form of refund structure when the fund underperforms.

Dan Brocklebank

Equity Analyst

Orbis Global Equity: GB00BH6XLH54

Net asset value: $170.5 (as at 5 Nov)

Portfolio size: $7.4 billion

Fund Facts

Type: Open-Ended Investment Company (OEIC)

Launched: 1989

No. of holdings: 124

Active share: 91%

Benchmark: Average Global Equity Fund Index