If you want to feel reassured about the outlook for the world over the next decade, a conversation with Alec Cutler is probably not to be recommended.
Alec, who has been co-managing Orbis Global Cautious Fund since 2019, sees a litany of dangers on the horizon.
But, if you are seeking some safety amid whatever lies ahead, his £111million fund is designed to offer investors precisely that.
It invests in debt issued by governments around the world as well as in some of the largest companies – and aims to produce a solid return while taking only a small to medium amount of risk.
And right now, Alec and his team are doubling down on reducing risk. ‘The outlook for the world is hugely uncertain,’ he says.
‘We’ve had relative peace for 30 years, so people have started to think this is normal. But if you look back over the last 3,000 years, 30 years of peace is about as long as you get.’
Geopolitical ruptures are not his only fear. Alec is also concerned about the sheer scale of spending by the governments of developed countries.
‘The US spends $1.2trillion a year servicing its debts,’ he says.
‘That’s twice its annual defence budget. Three years ago, it was $500billion. The vast majority of its spending is non-discretionary so it can’t easily cut back.’
Elevated inflation is also top of Alec’s list of concerns. He sees it remaining stubbornly high due to several factors, including the move towards net zero, which he sees adding costs to businesses. The increasing power of the workforce could also add to it, he says.
So how to prepare for these clouds on the horizon? US government-issued debt with inflation protection built in is one element.
So-called US Treasury Inflation-Protected Securities (TIPS) pay out a guaranteed sum above inflation – TIPS that promise to pay 3 percentage points above inflation would pay out 6.5 per cent if inflation was at 3.5 per cent.
The US Federal Reserve cut interest rates last week for the first time in four years, in a clear sign it believes the battle to control inflation has worked. Alec is reassured that it doesn’t matter whether the Fed is right – the portfolio is protected regardless.
The fund also uses hedging products against the risk of the US dollar losing value, as there is no point to a guaranteed income in dollars if it depreciates in real terms.
Gold – both physical and mining – is another component designed to protect against difficult times ahead.
Gold is often used as a store of value when inflation is rising. Exposure to gold now makes up around 12 per cent of the fund – up from 8 per cent two years ago.
It also invests in company shares which Alec and his team consider comparatively safe.
The UK market offers a wealth of these, he says. ‘We are seeing some wonderful opportunities. There are world-class companies such as Keller Construction, BAE Systems and Balfour Beatty. Some have very low valuations.’
He cites Keller Construction, which builds the foundations of skyscrapers, bridges and tunnels.
As such, it tends to be among the first to get paid, so it takes on some of the least risk.
‘We were able to buy it at only five times earnings because it was so undervalued,’ says Alec.
Similarly, the combined value of the cash on Balfour Beatty’s balance sheet and the infrastructure it owns are worth more than its market capitalisation.
Orbis has turned a £100 investment into £126 over three years and £130 over five. It has outperformed its benchmark of portfolios containing 20-60 per cent shares (with the rest in fixed income) over one, three and five years.
It has an annualised performance fee of 0.96 per cent over five years and its stock market identification code is BJ02KT7.
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