Home / News / ‘Everybody will listen to the 99’: Why consensus rarely triumphs

Massive dispersion still remains in the aftermath of a relatively minor correction, and now is the time to scrutinise consensus expectations for some market darlings.

“If you ask 100 engineers how much steel and concrete are required to build a bridge, and 99 engineers say x amount of steel and y amount of concrete, and one engineer – just one – says half of x and half of y, I think there’s probably more chance of falling pregnant via wind pollination than of anybody following the one,” Simon Mawhinney, managing director and chief investment officer of Allan Gray, told the Inside Network’s Equites and Growth Symposium.

“Everybody will listen to the 99. In engineering, that makes a lot of sense… In investing it’s usually a bad idea.”

Prices mostly already reflect “the nirvana people are expecting”, and companies are set up to fail “before they’ve even gotten out of bed.” When expectations are lofty, it doesn’t take much to disappoint them. When companies are already disappointing, or have fallen victim to a drawn-out economic cycle that’s withered their fortunes, the future just needs to be “slightly less woeful.”

Just a year ago, investors couldn’t imagine a future without ASX darling Afterpay and its many copycats. Conversely, traditional energy was on the out, expectations for the sector crushed under the awesome weight of 2050 commitments and a new wave of electric vehicles. In the wake of a mini Tech Wreck and the burgeoning war in Ukraine, things look very different.

“When sentiment is so universally weak – not necessarily in energy – that is the time to pay the most attention and allocate a disproportionate amount of one’s portfolio towards that, provided the price has adjusted accordingly,” Mawhinney said, noting that massive dispersion still remains in the aftermath of what has been a relatively minor correction.

“We’ve seen this energy adjustment take place anyway, because over the last year it’s been a reasonably decent performer relative to technology. But over a longer period of time, it hasn’t really moved the dial much. Oil prices… are amongst the highest they’ve been in decades in dollar terms, but the underlying share prices have barely recovered off their lows.”

Mawhinney’s contrarian pick is Ansell, which over-purchased high-priced inventories of PPE at the height of Covid and struggled to sell it in the face of rapidly falling demand and prices as Covid fears subsided. The impact of capacity expansions on an already over-supplied industry, the extent of labour exploitation in the industry’s supply chains and the defensibility of Ansell’s IP have all contributed to the poor sentiment.

“The market dislikes Ansell, and therein lies the opportunity because at least you know the price is somewhat reflective of some of the nasties which we all know about,” Mawhinney said. “… You’re getting a very boring company, reasonably priced, at face-level cheaper than the market but probably growing in-line with the market.”

Mawhinney contrasts that with Altium, an in-demand company that makes software that assists with the design of printed circuit boards. It’s grown incredibly quickly; 18 per cent per annum, with the market essentially acting as though that growth will continue ad infinitum.

“If you’re growing at 18 per cent per annum for five years, you will achieve what only two other companies in Australia have achieved, and that is CSL and Computershare,” Mawhinney said. “It would be a very tall order. Its market is growing at 6 per cent per annum… In five years’ time it would have 50 per cent market share. That’s highly unlikely.”

“Ansell is a boring company with some issues attached, but we think it’s good value, and for that reason we think it’s a better thing to own than Altium.”