Orbis, Part 1

An interesting report this quarter from our preferred equity managers within our own portfolios - Orbis Investment management.
Their global equity fund invests in equities all over the world and seeks to earn higher returns than world stock-markets. The Fund’s Benchmark is the FTSE World Index, including income (“World Index”). The Fund’s currency exposure is managed relative to that of the World Index.
It’s worth comparing their annualised performance with their benchmark:

	From Inception on 1 Jan 1990	Last 5 Years	Last 3 Years
Orbis Global Equity	15.0	18.7	22.0
World Index	7.7	11.4	18.1
Average Global Equity Fund	6.7	9.9	15.5

Their approach is bottom-up - i.e., they seek out individual stocks, irrespective of where these are located. This is exactly what you want from a chosen equity allocation but the opposite from what you should demand from a portfolio manager.
Interestingly, though, this approach has seen the fund’s exposure to companies listed in the US steadily rise from 27% to 42% over the past year. This has been funded out of the reductions in exposure to Japan (27% to 15%) and South Africa (7% to 2%). All of these shifts bring the Fund’s country weighting much closer to benchmark weighting, but they are nonetheless driven by the bottom-up stock-by-stock decisions, and not by top-down macroeconomic analysis of specific countries.
Orbis point to recent decisions to buy stocks such as Microsoft and Cisco in the US and to sell Sasol in South Africa as exemplifying this dynamic. Sasol is an integrated oil, gas and chemical company with industry-leading synthetic fuels technology. The Fund initiated a position in Sasol in 2000 when the oil price was around $30 per barrel. Aside from its valuation, at 10 times reasonably depressed earnings, what attracted them most to Sasol was that it owned and operated the world’s largest commercial coal to liquids facility and had viable plans for commercialising the technology. Moreover, unlike most global oil majors that were struggling to replace oil reserves, Sasol had in excess of 30 years of “reserves” in the form of coal deposits.
So why did they sell? Firstly, the share price more than quadrupled and relied on continued high oil prices. Secondly, the high oil price brought with it increased risk that taxes would be levied on what could be perceived as windfall profits, adding further uncertainty to the company’s potential for future earnings growth. Lastly, while the stock was still not expensive, they believed Sasol was no longer as attractive as other global investment opportunities that their research process had uncovered.
During the time of Sasol’s great run, large-cap growth stocks were terrible performers, badly hung over from the gluttony of the 90s. As a result, they have been until recently the least-loved market segment. Down 70% from its 2000 high, Cisco is typical of these. It is the world’s leading manufacturer of internet networking equipment with dominant positions across various segments. Throughout its history, it has been extremely well managed and has consistently leveraged its high commitment to research and development and technology leadership to great competitive effect. This has translated into superior historic growth rates, both in magnitude and quality, a relationship Orbis fully expect will continue into the future.
Cisco is financially sound, supported by a sizable cash stockpile and ample free cash flow generation. Despite Cisco’s exceptional quality and track record of success, the Fund was able to buy it at 17 times next year’s earnings, almost in line with the average p/e of the US stock-market. Cisco happens to be a US company and Sasol South African, so Cisco’s purchase and Sasol’s sale translated into a large shift in country exposure. But, as can be seen in the above descriptions, neither decision was based on benchmark exposure or macroeconomic analysis. They merely reflect the same competitive process for investment capital within the portfolio that has successfully driven the Fund’s investment process since its inception.
Above, we have described a bit about one of our preferred equity managers within our own portfolios - Orbis Investment management. As well as their global equity fund, we also hold their Japan fund which invests in Japanese equities in Yen, US$ and Euro classes and their market neutral funds.
The Benchmark of the Japan Fund’s Yen Class is the Japanese stock market, measured by the Tokyo Stock Price Index, including income (“TOPIX”). The Yen Class does not hedge currencies and, therefore, is exposed to the Japanese Yen. This US$ and Euro fund includes currency hedging.
It’s worth comparing their annualised performance with their benchmarks:

In all markets, Orbis buy stocks that are selling at a significant discount to what they believe is their intrinsic value. Whilst this approach often leads to stocks that satisfy the low price-to-earnings or price-to-book definitions of value so popular today, there are times when they’ll pick something that doesn’t meet the more traditional value metrics. The key reason for this is the inclusion of growth and quality measures in their assessment of intrinsic value. They are both qualitative and quantitative in their approach.
The Japan Fund’s history with Sundrug serves as an excellent example of this. They first acquired Sundrug in 1998 (at the Japan Fund’s inception). At that time, it was a small drugstore chain with a mere 83 stores and 41 billion Yen in revenues. They were very attracted to the opportunity to buy a company with a demonstrated high teens growth rate, 10% return on equity and seemingly limitless future growth potential, even if they had to pay 14 times earnings and 1.6 times book value.
This call was richly rewarded over the ensuing two years, capturing a 6-fold price increase before they exited the shares in 2000. In 2003, they began repurchasing the shares at Y350 (split-adjusted) after a correction of nearly two-thirds, and the Orbis Japan Fund now owns over 7% of the company.
At today’s price of Y2675 and valuation of 23 times earnings and 4.2 times book value, Sundrug could hardly be considered a traditional value stock. However, they continue to hold it because its other attributes look similar to the first time they purchased it back in 1998. Historic earnings growth has topped 20%, matching its return on equity. Sundrug continues to have excellent management, and importantly, still has plenty of room to grow before becoming mature. With less than 1% market share and 415 stores Orbis believe Sundrug continues to have the ability to grow earnings faster than 15% per annum going forward (as opposed to 5% for the Japanese stock-market as a whole).
Sundrug operates in perhaps the most fragmented of all industries, with chains representing less than 20% of the some 74,000 drugstores in Japan. With a generation of entrepreneurs who started their family stores after World War II preparing to retire, this is a sector ripe for consolidation and the expectation is that Sundrug is well positioned for that environment. It is not the largest drugstore chain in Japan but it is the most profitable. Its business model was forged in the most competitive region for drugstores in Japan, Kanto, and it maintains the highest margins in the industry.
Sundrug has strict criteria for site selection and is disciplined in not overpaying for locations. As a result, it is unique in the industry as it very rarely has to close stores.
Orbis believe Sundrug is a great example of the opportunity that can avail itself when a market becomes intently focused on valuation at the expense of quality and growth. Orbis expect to continue to hold this stock until the pendulum swings and the price offered by the market adequately compensates for the stock’s potential.
To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com.com

Snap Shots: by Harry Flashman

The film and digital discussion continues

Two weeks ago I discussed the relative advantages and disadvantages vis-à-vis using digital and print film. This subject had come up following a letter published in the Bangkok Post, and my column in return prompted a response from a reader (and photographer) in America. It is a reasonably lengthy letter, but the writer brings out some very salient points, and I have published it in toto.
“I just finished reading your latest column; ‘Technology is sometimes too smart?’ I found it a thought provoking comparison between film and digital cameras. I used film from 1970 until 2005. Enjoyed all those years of snapping away. Did not enjoy having to pay the development costs when I did not use the entire roll of film. Or having everything printed when some were not worth looking at. Then my parents bought me a digital for Christmas 2004 and have not looked back.
“I have a few quibbles with the BKK Post letter writer that was having problems with the digital revolution.
“1. I now have a Kodak Z612 and I can get 784 photos with a 1 GB SD chip using standard compression and 4.0mp settings. 4 million mp is plenty unless you are enlarging to a huge size. This is considerably more than the 432 frames the letter writer has at his disposal after carrying 12 rolls through countless airport scanners. If I go to 5.3mp setting so I can enlarge to a huge size, I still get 596 shots versus his 432. The nod must go to digital on this score.
“2. He states that he has to buy three memory chips at 3,000 baht each to get the same storage as his 432 frames. Nonsense. My 1 GB SD has 596 frames at a high setting and cost me $15 at Fry’s here in Vegas. I can get a 1 GB SD chip online for $10. Long way from his stated 3,000 baht each. He is either exaggerating for effect or shopping at the wrong store. Not a valid complaint IMO.
“3. I can delete the shots I know are crap and free up space on my SD chip. Or I can go into almost any photo shop, burn a CD and free up the entire chip. I did this in Vietnam, Laos, Cambodia and Thailand. Cost $3 per CD. Don’t have or need a laptop. Lack of electricity therefore is not an issue. Perhaps Nepal, Tibet and rural Russia do not have shops ready for the digital revolution, but I also doubt they can print anything worthwhile for a film camera either. I seriously doubt the writer would trust his precious photos to a rural photo shop in Tibet. This quibble is without merit as I already have more frames than his 432 without deleting the obviously poor quality shots as I travel. He has to wait until processing and pay to see what he has captured. I know on the LCD screen what I have for free. No comparison between film/digital in this area.
“4. Now battery objections. I took four Energizer e Lithium AA batteries with me on my last trip to Asia. I got over 1,200 shots with four AA batteries. This was with my Fuji FinePix A210. If I used an Energizer e Lithium CRV3 Li-ion I would get over 600 shots with my Kodak Z612 with one battery. No need for another battery or a charger. Just buy Lithium. I do have rechargeable CRV3s for my Kodak and the charger is so small it is a non issue. About the size of a pack of cigarettes. This quibble is without merit.
“In closing, the BKK Post letter writer obviously loves his film camera and is finding reasons to knock the digital revolution. Fine. We all have freedom to choose what we buy and use. I have used both film and digital and will never buy a roll of film again.
“Thanks for your column and lending an ear, Mike.”
Mike, I believe you are quite correct on most of your points. However, I can also understand the BKK Post writer’s love for his film camera. Which is why I still use an FM2N.

Modern Medicine: by Dr. Iain Corness, Consultant

Pin your hopes on PNI

It’s a little joke around town that when I get asked the standard question, “How are you?” my standard reply is, “I’m always well,” to the English speakers; or “Sabai dii samur” to the locals. Now have I discovered not only the elixir of youth but also the secret to permanent health? Unfortunately it is No! on both counts, but those words can have more effect on your life than you would imagine. It’s all to do with PNI.
So what is PNI? To give it its full title, the letters stand for Psycho-Neuro-Immunology, which explains very quickly why we just say “PNI”, doesn’t it! (And as you know by now, we medico’s love acronyms!)
In this rather inexact “newer” science, what the boffins have been able to do is to measure the body’s physical response to emotional stresses. This is not a simple, “I’m under stress so my (blood) pressure’s up,” but is a valid scientific attempt to quantify the psychological insults to the body in physically measurable terms. Not quite rocket science, but getting close.
We already knew that those people who “drop their bundle” under stress appeared to do less well than those who kept up a cheery disposition, but it was all fairly anecdotal stuff. However, there were some studies that showed that those people with a positive approach were more likely to “get over” a cancer, or live longer despite the cancer, than those people with a negative attitude. The positive people had significantly better five year survival rates for any cancer, than the negative folk. But we didn’t really know why.
As Immunology became a real science, with the ability to measure immune responses by examination of the blood, we began to get a better idea of just what was going on. And guess what? It appeared that people under “stress” depressed their immune system! Was this the answer? Stress reduces your ability to fight things off. Elegantly simple, but unfortunately, too simplistic!
Further studies were done by researchers all over the world and the same results were not duplicated. Sure, sometimes stress appeared to reduce personal immune response, but other people did not show the same effects when under the same type of stress. Just who was fooling who?
At this stage, someone remembered the old studies on five year survival rates and the differences between positive and negative approaches to life, and the immune response measurements were repeated. Now guess what? The positive people had better “immune counts” than negative thinkers. So it seemed as if the positive thinkers were showing immuno-enhancement while those with negative outlooks and poor coping skills ended up with immuno-suppression. This was, believe me, a real breakthrough.
The medical scientific community began to look at disease processes in a new light. The British Medical Journal now reported a very strong relationship between breast cancer and women who were handling stressors poorly. In fact, another study showed that women who were severely depressed were almost four times more likely to die from all causes over a five year follow-up than those who were not. Another study following the progression of HIV showed that those with immuno-suppression (from poor coping skills) doubled the rate of progression of the disease, compared to those with immuno-enhancement.
For my money, this is enough. There is some scientific basis for my “Sabai dii samur” and it is that positive thought that I present to you today. Now, “How are you?” And if your reply is “All right, I suppose, but I’m still trying to shake off a cold,” then just remember that the reason the cold is hanging on might just be related to PNI.

Learn to Live to Learn: with Andrew Watson

Altruism, Nationalism and Globalism

In some respects, it could be argued that Tsolidis’ (2002) views, citing altruism as a characteristic of teachers, for instance, are naïve and underdeveloped and represent no more than an idealistic aspiration. It appears that she has allowed her idealism to cloud the pragmatic reality of international school existence. Even the most altruistic teachers who are hoping that through education they can help create a ‘better world,’ are surely hoping to create such an improved environment for themselves as well? The bottom line is that it is by no means proven that teaching in general and international school teaching in particular, is an ‘altruistic’ activity. Just consider the reality of living and working in Thailand; the chance of a life by the sea, unlimited golfing opportunities, exploring an extraordinary part of the world in safety and opulence, with a range of expatriate living conditions attached?
Where Tsolidis gets it right in my view, is where she talks of successful citizens of the future as being those who have ‘fluid rather than static cultural identities,’ a vision which surely also applies to the international school teacher. It is a necessary requiem to nationalism to acknowledge that one is no longer bound to a nation. To paraphrase Marx, “We have nothing to lose but our narrow allegiance”. Identities are no longer fixed. It is perhaps only since 9/11, compounded by subsequent atrocities (Bali, Iraq) that what Martin Amis (2006) calls ‘Horrorism’ has sent people scurrying for the paper-thin protective illusion of national identity.
In the race against narrow nationalism and unilateral extremism, the idea of ‘global education’ such as envisaged by Mandela (in Jenkins, 1998), however powerful and innovative, requires more than active ‘small cells’ and international schools are a pretty small and amorphous bunch, representing but a fraction of the world’s educational responsibility and liability. This is where ideology falls down and pragmatism picks itself up. Where paradigms clash, whether it’s socialism vs capitalism or realism vs rhetoric, if there’s an element of doubt, then pragmatism is the victor. But how far would we travel, before we compromise our ideals, either in the micro picture or the macro?
In the IB world of education, it is as if a ‘better future’ relies on the manufacture of catalysts for change, who are ready, willing and able to open broader vistas of experience to humanity, consistent with left-leaning liberalism. But there is no guarantee that these gurus either have, or will appear. It’s like waiting for the Messiah, or at least, for Godot. Writing almost ten years ago, Jenkins, (1998) notes, “What seems to be absent is any coherence, system or planning and above all any all inclusiveness and comprehensiveness in tackling the issues. An inspired discussion in class from time to time, in one school or another, seems a long way from facing up to the stark realities which must be the property of everyone”.
Educational establishments locally, regionally and globally seem so disparate, united only by determined conservatism, that by the time progenitors of real change have become leaders, they have forgotten what they believed in and probably why they became teachers in the first place. If education is merely an echo of society, a glance back at the history of the twentieth century doesn’t engender a great deal of hope. There’s a lot of reaction, not a great deal of pro-action. Often, it is only in the wake of a disaster that any real thinking is done and ‘culture pessimists’ (Hofstede, 97) question whether human society can ever exist without conflict anyway.
In the rush to rhetoric, to the hyperbole, it is once again crucial to remember that the core business of a school is teaching and learning. But if we are to bridge the gap between rhetoric and reality, it is necessary to ask; “How do we teach the mission statement?” Tsolidis (2002) assumes that students should be taught to explore in democratic ways and in so doing, illuminates a potential pitfall at the very centre of a leftist western humanist educational doctrine (which is what the IBO Mission statement is).
Many cultures and national systems of government simply do not share the same socio-economic politics of the ‘West’. It could be argued that their belief and values systems are fundamentally incompatible with Tsolidis’ definition or apparent understanding of democracy. One central tenet of the IB programmes is that they encourage students to be ‘inquiring’. In some cultures, for ‘inquiring’ read, ‘insolent’.
Another central tenet is ‘intercultural understanding’. How can both of these apparently contradictory aspects of the mission statement survive side by side? Critics of the IBO ask, “Why give false hope to a nation’s population? What right do you have to claim that your brand of ‘unapologetic ideology’ is any different from any other kind of rampant extremism?” In asking “How do we imagine global citizenship?” Tsolidis seems to believe that natural evolution towards homogeneity amongst humanity will happen as a result of the application of certain brand of teaching and learning. But she doesn’t ask herself whether this is either something desirable or achievable. The IBO would claim to have some answers to this question, as would ‘Round Square Schools’ (of which the Regents in Thailand is a prominent and excellent example). As does Rabbi Jonathan Sacks in his book, “The Dignity of Difference.”
It remains my personal view that the IBO curricula, by its particular brand of unapologetic idealism, characterised by its celebration of cultural diversity and its acknowledgement of the imperative and opportunity which this new industrial age (the age of technology) has brought with it, goes farther than any before in preparing students for the challenges of the twenty first century.
The devil, however, remains in the detail. Maslow recognised that there are many people for whom the principles of enlightened management or enlightenment itself, will fail; “People who are too sick to function in an enlightened world.” But that’s the point; if you have neither the education, the experience nor the expertise to understand what Maslow’s talking about, nor the willingness to learn about it, you’ll never truly achieve self-actualisation. It’s simple really; it’s like trying to bring an IBO Programme into a school and neither understanding nor wanting to understand what the central component ‘TOK’ (Theory of Knowledge) is all about. Maybe, after all, the IBO mission is like democracy? Perhaps (to paraphrase Churchill) “it’s the least worst form of education.”
Next week: The global desire for change