With many countries in lockdown, uncertainty prevails. Against this backdrop, many clients are asking for our views on the economic impact, an update on our performance, and what we are doing to position the portfolios for a very uncertain future. Tamryn Lamb summarises the answers to some frequently asked questions after a recent Q&A Zoom session with Andrew Lapping, our chief investment officer, and Duncan Artus, portfolio manager. You can view the recording of the Q&A by clicking on the image below.
1. How is this crisis different to previous periods?
We have managed our portfolios through a range of different crises since 1974. This period is different, however, in that it is both a financial crisis and a health crisis. The necessary approach that governments are taking to tackle the health crisis will also have a very real-world impact on households’ disposable income and many businesses. There are two other key differences. In our view, South African assets were not obviously overvalued coming into this period and there were not significant disparities in valuation in the local market as in 2002 and 2008. Finally, there is more debt in the world today than there was before the global financial crisis (GFC).
2. How have the Allan Gray portfolios performed over the past quarter?
Our portfolios have not performed as well as they did in previous downturns. The Balanced Fund declined by 15% over the past quarter, which is disappointing given that we strive for real returns over the long term. This was partly caused by the indiscriminate nature of the sell-off, with virtually no asset classes spared other than US dollar cash. While the contribution from offshore and Africa has been modestly positive in rand terms, bonds have declined in price as yields rose to above 10% – hit by both the downgrade and a broad sell-off in emerging market debt. Our equities have also not outperformed the broader market to the same extent as they did in the GFC. In 2008, we held no BHP or Anglo American, instead holding SAB Miller and a large hedged equity position. In this downturn, our top positions, such as Naspers, Prosus and British American Tobacco have not fallen as much as the market, but the remaining shares have not been spared. The largest detractors from performance over the past quarter were Sasol, Glencore and the banking shares. We wrote about Sasol in a recent article on our website (see “Coronavirus: Taking stock of the state of the markets”) and our comments on Glencore and the banking shares can be found in the latest factsheet for the Allan Gray Balanced Fund (to be distributed later this week).
3. Is this crisis an opportunity to find mispricings?
We believe so. South African equities have rarely been this cheap, the recent rand weakening is analogous to that experienced last in 2001, and South African bonds are trading at yields which suggest an above average, real return of approximately 5%. In addition, our offshore partner, Orbis, believes the relative and absolute return potential from their positions is exceptional. Importantly though, this is not an indiscriminate buying opportunity. We (and Orbis) are cautiously allocating capital to new and existing positions focusing on businesses that look well positioned to survive – mindful that the actions taken to stem the spread of the virus will have an impact on earnings and on the cost of capital for businesses and that the future can take several paths, some worse than others.
4. What changes have we made to asset allocation positioning of the portfolios and what type of recovery should we be anticipating?
We have not made many changes to our asset allocation positioning. We are modestly increasing our equity allocation and incrementally allocating to fixed income securities with longer duration. We have repatriated assets to a certain extent to take advantage of the rand weakness but remain at the maximum offshore exposure. We don’t know what path a recovery will take, but we suspect it may not be that simple to “restart” the economy, and consumer behaviours will change as a result of this pandemic. Notwithstanding this, we believe the absolute and relative return potential in our portfolios is very high.
5. What key messages would you suggest advisers give to their clients?
From Andrew: We know it feels comfortable to be in cash when the world around you is collapsing. Is this the best way to position yourself for the long term, and would you be happy if you were 100% in cash 12 months from now? It is important to consider what assets you own today: Are they over- or undervalued? If they are undervalued, you definitely don’t want to sell them now. Historically when shares have been bought at these valuations, the future returns have been great.
From Duncan: Prepare yourselves and your clients for the fact that the headline news is going to continue to be bad and things might get worse before they get better. From Allan Gray’s perspective, we continue to do the same job we have always done and are focused on doing our best to navigate this uncertain environment for our clients.