Four Principles for Choosing the Right Active Manager

1.UNDERSTAND THE INCENTIVES

Incentives are strong drivers of human behaviour. Are the manager’s interests are aligned with those of the end investor?

Key things to look for that show a manager is closely aligned with their investors:

• Ownership structure – Is the manager privatelyowned, or are there external shareholders driving behaviour and focusing on shorter-term results? Also co-investment shows the manager has ‘skin in the game’. It is worth asking your manager if they put their money where their mouth is.

• Performance fees – Do fees benefit the manager no matter whether they underperform or outperform or are they dependent on actual results?

• Activism – Does the manager make use of opportunities to potentially influence companies towards shareholders’ best interests? Examples could include managers engaging on remuneration and corporate governance.

2.FOCUS ON THE LONG-TERM

Buying shares means investing in a business, so the manager needs to act like a long-term business owner.

This is sometimes ignored, as is evidenced by the fact that the average holding period for shares listed on the New York Stock Exchange in June 2020 was only 5.5 months. In which case, is the manager making decisions based on the long-term fundamentals, or on short-term noise?

1SPIVA® Europe Scorecard - Source: S&P Dow Jones Indices LLC, Morningstar. Data for periods ending 30 June 2022. Outperformance is based on equal-weighted fund counts. Index performance based on total return. www.spglobal.com/spdji/en/research-insights/spiva/#europe

3. BE SCEPTICAL OF OVERCONFIDENCE –ESPECIALLY ABOUT THE FUTURE

The future is more uncertain than people believe, and many investors are prone to overconfidence in their assumptions and their ability to interpret information.

Though it is tempting to think that we can accurately predict the future, history tells us a different story.

The key is to accept no-one can predict the future, instead consistency of process is key. A manager who is focused on the long-term and has the conviction and ability to stick to their investment approach regardless of the market is more valuable than one who changes their approach based on the current market trends.

4. EMBRACE CREATIVITY

Your active manager should not oppose consensus for the sake of it, but rather be an independent thinker who evaluates arguments against commonly held views.

Humans like to stick with the herd and look at what other people have done, but this does not always produce good results, particularly in investing. This is because share prices aren’t driven purely by the outcome of a particular event. Instead moves can be exacerbated by the difference between the outcome and what the market and other investors expected the outcome to be.

So, for contrarian investors it comes down to finding

Important Notices

opportunities where the outcomes are likely to be better than the expectations.

Thinking differently

The more successful investors over the years are those that look at the wider picture, and many active managers have evolved to do just that.

At Orbis, we try to only invest in a company once we have a strong view of what it’s worth (its intrinsic value) and aim to buy its shares at a price that is below that. But to do so, you have to understand the reasons why the seller is selling at a cheaper price.

Once the shares of a company go past our estimate of its intrinsic value, then we are happy to sell that on to other investors who may think there is further to go, as this allows us to invest those proceeds into something else that we think is undervalued.

Sometimes people say that contrarian investing, opposing the consensus, comes with more risk. But our view is that this approach can avoid the risk of overpaying for shares that are very overpriced.

Both active and passive investing approaches have their pros and cons. This is why it makes sense to have a blended portfolio, utilising the strengths of both to create a truly diversified and balanced portfolio. However, keeping in mind some simple principles when choosing the active element and looking at the situation from a different perspective can hopefully help make the decision a little less complex.

The contents of this commentary have been approved for issue in the United Kingdom by Orbis Investments (U.K.) Limited which is authorised and regulated by the Financial Conduct Authority.

Past performance is not a reliable indicator of future results. When investing your capital is at risk.