Currently based in London with OMGI, Crabb is expected to join the Hong Kong office in March to head a four-person team covering Asian equities.
Crabb has outperformed his peer group consistently over 1, 3 and 5-year periods, according to FE data. He spoke to FSA about his contrarian approach to investment.
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Source: FE. Data to end of January 2015.
A recurring theme with him is, in the broadest sense, timing.
For example, when assessing potential investments, most people usually visit companies when things have been good and a road show has rolled through town. Crabb sees that as backward looking.
“When things are bad is when you talk. It’s more about contact with the investee company at the right time to understand the industry. Timing about when to talk to companies is critical. It’s when changes in the industry are in the air.”
Backward vs forward
Timing is also about the wrongness of making investments based on what has happened as opposed to what is likely to happen.
“Go back three years ago, when everyone liked emerging markets and commodities and Chinese consumption growth and hated the US because of lack of job growth, fiscal cliffs, high debt. Now the US is quite expensive and people are all positive on it. People tend to look backwards, which tells you what has happened rather than what is going to happen.”
Crabb believes most investors are style driven. Any investment style usually works, but only over a period of time. He mentions price-to-book investing.
“A low price-to-book is a good longterm way of investing. But they don’t tell you that the return profile tends to be skewed. That style usually generates outperformance in one-two years out of ten.
“In 2009 when the market turned, low price-to-book had a stunning profile. Most people invested [in 2011 and 2012] and in the following years that style didn’t do well at all. It’s the same with growth and defensive investing.”
Further on the theme of looking forward, Crabb provided the example of India, where stocks are no longer cheap since the reform-minded government of Narendra Modi took office in May last year.
“You make returns through multiple expansion, earnings growth and dividends. Look at India. Modi came in and multiples massively expanded. It’s unlikely that the return profile from here is multiple expansion. Next are dividends, which are practically non-existent in India.
“Turn to earnings. India is a good story but where to get the earnings? A lot of companies people like have been the same they liked for ten years: a big private sector bank, for example. Why have these companies done well? Not a lot of foreign competition, they are big enough and have good enough political connections and large enough infrastructure, which is lacking in India.
Under Modi, the expectation is a big infrastructure build up, promotion of foreign direct investment and an anti-corruption push, he said.
“That environment is not fantastic for those existing companies that have done well. But there are a lot of companies below them that are trading at discounts that could do well with access to better infrastructure, better bids on contracts based on merit, not connections, and are least impacted by foreign competition.”
Index aloofness
In October 2014, Crabb joined OMGI from BlackRock, where he had worked since 2007 and ran the BlackRock Global Funds Asia Pacific Equity Income fund. He declined to discuss reasons for the move except in the most general terms.
OMGI is in a growth stage, he explained. “They’ve hired some fund managers with strong track records across disciplines and have the ability to grow market share.”
He added that in Asia, a handful of global houses have concentrated the market. “OMGI has products not at saturation levels but a bit more differentiated. They are not so index oriented.”
Despite the sometimes astonishing similarities between funds from different fund houses, particularly the global ones, Crabb believes crisp differentiation is possible.
“You can differentiate, but you take a risk when you do that. Most people are unwilling to be different to the index. If they are, it’s only what everyone else has done. Everyone loved Macau gaming a few years ago. It’s been an absolute disaster since.
“Investors are overly concerned about monthly performance and that tends to drive them toward an index. The world has become very risk averse.”
He said he looks at risk like it was a probability tree. “Everyone tries to get catalysts. I ask at today’s valuation, what are the paths it could go on? There is always a downside. But if the probabilities associated with that downside are relatively muted, with a favourable upside, then I invest.”
Certain biases
Despite outperformance versus peer mangers, Crabb doesn’t always get it right, as he explained.
“There are certain biases we all have. I tend to have it around inflection points. I like to be contrarian. If the stock has done very well and is expensive, I prefer not to own it.
“But sometimes these stocks can get very large. [For example], a stock like Tencent – well-loved, expensive, done very well.
“You’re happy to take a big position in it. I’m guilty of that. That’s the biggest thing you get wrong. Usually at stock level, damage can be relatively limited from a portfolio perspective. There’s a big difference between risk at stock level and portfolio level.”
Oiling the growth engine
Currently, his forward looking view on oil has led him to take positions in companies with share prices impacted by association with oil, but with earnings not driven by oil prices, such as those involved in rig repairs. These companies can be good investment opportunities because they are positioned for growth as oil eventually stabilises, he said.
Oil price deflation will be positive for Asian equities, Crabb believes, adding that 98% of Asia’s market capitalisation is from oil importing countries.
“The fall in oil prices is a massive stimulus permeating through these economies.”
