The Orbis Balanced fund has shifted towards the more cyclically-oriented parts of the global equity market in anticipation of an "explosive" recovery for value, despite renewed pressure on those stocks from the coronavirus pandemic, according to manager Alec Cutler.
Cutler told Investment Week that while he managed to find some "quality names that were being jettisoned", "at the maximum point of pain" in the February and March market sell-off, his gaze then turned "towards things that are closer to the epicentre of the crisis".
"Early on in the drop, we were able to put new positions on in Alibaba, Comcast and Disney," the Bermuda-based manager said of firms he sees as being "quality names… with rock-solid balance sheets".
However, soon after those stocks were brought into the fold, he looked "further up the risk spectrum" towards more contrarian opportunities. These included names in the aerospace sector such as Rolls-Royce and Howmet.
"The whole world was looking for the same thing - stocks that had been beaten up with lots of free cashflow and no risk of collapse," Cutler explained.
"Our gaze shifted towards those assets that do have debt-loads and are closer to the epicentre of the crisis but where 60% to 70% [share price] drops are absolutely not warranted [because of] the value and cashflows coming from their other businesses."
For instance, Rolls-Royce's defence business "gives us the trust and confidence that Rolls-Royce can see itself through", Cutler reasoned.
"We see something like Rolls-Royce as a typical contrarian opportunity."
Cutler said he is finding few opportunities in fixed income, with the fund's exposure at its 10% minimum, noting "it is very difficult to buy bonds on a valuation basis when you have an uneconomic buyer [the US Federal Reserve] participating".
That position includes 5% in corporate bonds "where we have a very strong sense of our ability to get repaid," he explained, but no government securities with a duration of over 18 months, which "look like reward-free risk to us".
The fund is at its maximum gross equity position of 80%, but when hedging is factored in, its net equity position is currently neutral at 60%.
The remaining 10% of assets is in gold, including its largest holding, the WisdomTree Physical Gold ETF alongside some miners.
"That is reflective of this notion that we do not know what the future is going to hold," Cutler continued.
Indeed, one key metric he looks at is a rolling over in news mentions of the virus. "In all prior crises you wanted to buy when the news mentions rolled over and people move onto the next thing. We are not there - it is 24/7 coronavirus still."
Cutler believes "we might be in a very positive environment for value and cyclicals currently", with most investors "so fascinated by the risks to the economy [and] no visibility on stabilisation, much less recovery".
When that recovery comes, Cutler said, "it could be explosive for value".