Allan Gray: Distortions are creating opportunities

There are times in investing when it feels like the market is passing you by and that the rules have changed. Speak to any fundamental investor, however, and they will tell you that valuations sit at the core of any good investment.

The recent SpaceX IPO set all kinds of records. Valued at US$1.77 trillion, it was the largest IPO in history, raising an unprecedented US$75 billion. The float minted the world’s first trillionaire, and Wall Street bankers pocketed US$500 million in fees - the largest single-day payout in history. Australian retail investors were even invited to participate in a US IPO for the first time, and they turned up in droves (an estimated 30,000 of them).

I wasn’t one of those investors. While I’m not sure if a price-to-sales ratio of 115x is an absolute record, it certainly falls outside the realms of what a typical fundamental investor would consider reasonable. But for now, those who backed the IPO are smiling as SpaceX shares soared post-listing (well played).

Simon Mawhinney, Managing Director and Chief Investment Officer at Allan Gray, has spent the past 20 years investing with an unwavering focus on fundamentals. Mawhinney has willingly avoided the "investment of the moment" in favour of finding businesses where valuations look compelling, even if the underlying stories have imperfections.

It is reassuring to see that this contrarian approach can still deliver, even at a time when market distortions and concentration are at extremes. The Allan Gray Australia Equity Fund - Class A has returned 12.7% over the past year, beating the fund's S&P/ASX 300 Accumulation Index benchmark by 5.7% as at 31 May 2026.

What makes these results more impressive is that Allan Gray achieved them with near-zero exposure to the major banks, which Mawhinney believes have been stretched to unsustainable valuations.

How stretched, and why? Mawhinney believes an unintended consequence of the Federal Government's Your Future, Your Super performance test is one of the major contributing factors.

"The top 10 companies, for example, have vastly outperformed the other 290 companies in the ASX 300—in the order of 45% to 50% since 2021, which is when this test came into existence. That’s probably the biggest source of dislocation."

Quantitative strategies and systematic trading also play a role. Mawhinney notes that these have increased volatility, causing share prices to become divorced from fundamentals.

While there is no shortage of fund managers pointing out stretched valuations at the top end of town, there is also evidence that trade buyers and private equity firms are viewing the depressed valuations of smaller companies as a massive opportunity.

"We’re seeing that with a very small company we’re invested in at the moment called oOh!media," Mawhinney says.

Mawhinney doesn’t necessarily see this private equity swoop as a net positive, given it reduces the number of quality companies left to invest in on the ASX. It does, however, highlight that the market will ultimately recognise value - even if doing so requires greater patience than it has in the past.

Where Allan Gray sees value today

One driver of Allan Gray’s solid recent returns has been a long-held and very large position in Woodside Energy (ASX:WDS). Mawhinney pitched the stock on The Rules of Investing podcast back in 2021; it has subsequently returned over 102%, there is now speculation that it is being eyed by ExxonMobil as a potential acquisition target.

Mawhinney says that position has now been reduced, with the bulk of the proceeds being redeployed into former market darling CSL Limited (ASX:CSL). Despite recent multiple compression, and notwithstanding ongoing risks, the valuation has become sufficiently compelling for Allan Gray to own the business.

"At the end of the day, the multiple seems to compensate you for much of the risks that might follow... We just think it has been overdone and the rubber band has been stretched way too wide. From here it either snaps or pulls back - we don’t mind either of those two."

Mawhinney also sees a potential in rubber glove manufacturer Ansell (ASX:ANN), which is one of the firm's largest portfolio holdings at 7% of the fund. Like CSL, the stock has its fair share of blemishes, including recent changes in key leadership positions following the appointment of a new CEO in January and the more recent departure of the firm's CFO.

However, it also trades at a very undemanding earnings multiple of 14x, which Mawhinney believes offers attractive value compared to the broader market for a very similar earnings and growth profile.

"It’s a boring company, certainly unlikely to make you poor fast, and by implication, very wealthy quickly either."

A key part of Mawhinney’s thesis is management's disciplined approach to capital allocation. Aside from a brief pause to fund the Kimberly-Clark PPE acquisition, the company has spent twenty years steadily buying back its own stock.

"If all goes well, the share count will be back down to the lowest it has been over the last 15, 20 years. Its capital allocation discipline has been excellent, and it's one of the reasons why we're very attracted to it."

In an era of free-flowing capital, Simon Mawhinney and his team at Allan Gray refuse to budge on a core conviction: fundamentals still matter, no matter how unpopular that view is right now.

To watch the full interview please click here

Disclaimer: The information in this article is of a general nature only. It is not personal financial product, tax, legal, or investment advice. It has been prepared without taking into account your individual objectives, financial situation or needs. This article represents Allan Gray Australia’s view at a point in time and provides reasoning or rationale on why we bought or sold a particular security for the Allan Gray Funds. We may take the opposite view/position from that stated, as circumstances change. Before acting on anything in this article, you should consider its appropriateness to you, having regard to your objectives, financial situation and needs. You should obtain and consider the relevant Product Disclosure Statement (PDS) relating to any products mentioned, before deciding whether to acquire, or continue to hold, any products. A copy is available from (VIEW LINK) in the ‘Forms and Documents’ section. Equity Trustees Limited ABN 46 004 031 298, AFSL No.240975 is the Responsible Entity and Issuer of units in the Allan Gray Funds. Equity Trustees is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX:EQT). Past performance is not a reliable indicator of future performance, and there are risks with any investment. Neither Allan Gray Australia, Equity Trustees nor any of its related parties, their employees or directors, provide any warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it.