INVESTING IS OUR STRONG SUIT

A daily column on investing by Orbis Investment Management Limited

You may meet a senior representative from Orbis Investment Management Limited at the hotel. To make an appointment please contact the hospitality desk or call the Churchill Suite, room phone: 7554.

Value investing (the Orbis way)

Yesterday we briefly discussed the various approaches to investing. We primarily focus on equity investing. We mentioned that here at Orbis we believe that we can add to returns by active investment decision-making. Our philosophy is value-based, meaning that we think that the best opportunities are found by indentifying those shares that are at lower than historically normally levels when compared to the company's intrinsic value and current circumstances.

The process we use to select equities for our portfolios from the thousands available is disciplined and based on decades of experience.

Research Driven. Equities are selected using extensive proprietary investment research undertaken by the Orbis. Orbis devotes a substantial proportion of its business efforts to detailed "bottom up" investment research conducted with a long-term perspective, believing that such research makes superior long-term performance attainable.

Value Orientation. This research is intended to enable Orbis to invest in equities which offer superior fundamental value. Orbis determines whether an equity offers superior fundamental value by comparing the share price with an assessment of the equity's intrinsic value. The lower the price of a share is when compared to its assessed intrinsic value, the more attractive Orbis considers the equity's fundamental value. It is our experience is that over the long term equity investing based on this approach offers superior returns and reduced risk of loss.

Share Selection. Orbis' search for superior fundamental value is facilitated by the computerised screening of equities based on quantitative considerations. Orbis maintains a database of key information, including company fundamentals and share prices, on approximately 7,000 of the world's most marketable equities. These represent the target universe from which most of the portfolio is selected. The database comprises fundamental data which, wherever possible, extends back over 25 years in keeping with the long-term orientation of our research, and share prices which are updated daily. Orbis has developed quantitative models which use this database to estimate the total rate of return offered by each equity for the next four to five years, based on the prevailing share price. This, together with an analysis of macro-economic and investment trends, provides a preliminary assessment of the shares in the target universe which seem most attractive. Additional equities that appear intriguing are identified by anticipating economic and corporate developments.

This approach helps Orbis to focus its more time-consuming, non-quantitative equity research on the most promising sectors, themes and equities. Equities which are considered promising are subjected to "bottom up" investment analysis. The starting point is to eliminate those equities which have fallen out of favour for sound and enduring reasons (for example, the shares of companies which are poorly managed or vulnerable). The equities, which are not eliminated by this pre-screening, are subjected to intensive qualitative investment research. This entails evaluation of factors such as the company's perceived ability to generate superior growth in cash flow, earnings and dividends in the projected economic environment, the quality of management, its historical record, the company's competitive environment and the strength of its balance sheet. This culminates in an assessment of the equity's intrinsic value.

Orbis generally takes a four to five-year view when purchasing equities. We will not usually trade for short-term gains, although established positions may be reduced when we believes that a share is overbought, or added to when a share is considered to be oversold.