ORBIS GLOBAL CAUTIOUS FUND offers a safe haven in an increasingly dangerous world
If you want reassurance about the world’s prospects for the next decade, talking to Alec Cutler is probably not the place to be.
Alec, who is co-manager Orbis Global Cautious Fund has seen a whole series of dangers on the horizon since 2019.
But if you’re looking for some safety ahead of what’s to come, his £111m fund is exactly what you want as an investor.
It invests in debt issued by governments around the world and some of the largest companies. It aims to generate a solid return while taking only low to medium risk.
And now Alec and his team are redoubling their efforts to reduce risk. “The outlook for the world is incredibly uncertain,” he says.
“We’ve had 30 years of relative peace, so people have come to think that this is normal. But if you look back at the last 3,000 years, 30 years of peace is about the longest you’ll get.”
Geopolitical rifts are not his only fear. Alec is also concerned about the sheer scale of spending by developed country governments.
“The US spends $1.2 trillion a year servicing its debt,” he says.
“That’s twice the annual defense budget. Three years ago it was $500 billion. The vast majority of spending is non-discretionary, so it can’t just be cut.”
Higher inflation is also at the top of Alec’s list of concerns. He sees it remaining stubbornly high due to several factors, including the move toward net zero, which he sees adding costs to businesses. The increasing power of the workforce could also be contributing, he says.
How do you prepare for these clouds on the horizon? US government debt with built-in inflation protection is one element.
The so-called US Treasury Inflation-Protected Securities (TIPS) pay out a guaranteed amount above inflation. TIPS that promise to pay out 3 percentage points above inflation would pay out 6.5 percent if inflation were 3.5 percent.
The US Federal Reserve cut interest rates for the first time in four years last week, a clear sign that the fight to get inflation under control has worked. Alec is reassured that it doesn’t matter whether the Fed is right – the portfolio is protected either way.
The fund also uses hedging products against the risk of the US dollar losing value. After all, a guaranteed income in dollars makes no sense if the dollar loses value in real terms.
Gold – both physical and mined – is another asset designed to provide protection against the tough times ahead.
Gold is often used as a store of value when inflation rises. Exposure to gold now makes up about 12 percent of the fund – up from 8 percent two years ago.
It also invests in shares of companies that Alec and his team consider to be relatively safe.
The UK market offers a wealth of this sort of thing, he says. ‘We see some great opportunities. There are world-class companies like Keller Construction, BAE Systems and Balfour Beatty. Some of them are at very low valuations.’
He mentions Keller Construction, which builds the foundations of skyscrapers, bridges and tunnels.
That is why it is often one of the first to get paid and therefore also runs the least risk.
“We were able to buy it for just five times earnings because it was so undervalued,” Alec said.
Similarly, the combined value of the cash on Balfour Beatty’s balance sheet and the infrastructure the company owns is worth more than its market capitalization.
Orbis has turned a £100 investment into £126 in three years and £130 in five years. It has outperformed its benchmark of 20-60 per cent equity portfolios (with the rest in fixed income) in one, three and five years.
The annual performance fee is 0.96 percent over five years and the stock code is BJ02KT7.
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