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Quarterly Commentary

2011 Q4 Comments from the Chief Operating Officer

Over the tumultuous past year, the returns from lump sum investments in the Allan Gray Balanced, Stable and Equity Funds differ by less than 3%, and over the five years since the beginning of the financial crisis, the annualised difference between these three is 0.5%. In both cases the Stable Fund leads the pack. For valuation-oriented investors, disappointing past equity returns can be a signal to invest. In our view, this is not currently the case: at year-end prices, based on bottom-up stock analysis, the reward on offer relative to the risk of loss in most JSE-listed stocks remains as unexciting as it was a year ago.

Meanwhile, asset allocation funds like Balanced and Stable fulfil their brief by reducing the risk of loss and taking advantage of short-term buying opportunities. This comes from diversifying between different asset classes and, most importantly, by not taking on risk when it is not justified by potential gains. And reduced risk is a real benefit: since our asset allocation funds have managed to smooth over the dips that equity investors have experienced this year, it follows that fewer of these clients will have made a permanent capital loss by selling their investments at a damaging low point.

Delphine Govender

We are sad to be saying goodbye to Delphine Govender, who will be leaving Allan Gray in the next few weeks to pursue personal interests. Delphine has made an outstanding contribution to the success of our clients and our company over her more than 10 years with Allan Gray. She joined Allan Gray as an equity analyst in July 2001 and was appointed as a portfolio manager in 2005. She has served as a director on the boards of Allan Gray Proprietary Limited and Allan Gray Group Proprietary Limited since 2006 and on the board of trustees of the Allan Gray Orbis Endowment. We wish her well in her future endeavours.

In order to allow more than one manager to participate in individual decision making, we notionally slice clients’ equity and balanced portfolios into separate ‘manager portfolios’. This system makes each of our portfolio managers responsible for managing his or her ‘slice’ and accountable for their own individual performance. When a portfolio manager moves on, their ‘slice’ is re-allocated among the remaining portfolio managers. Re-allocations have occurred at regular intervals throughout our history and our portfolio manager system is well-suited to adapt to these changes. Over the last decade, the number of portfolio managers responsible for equity and balanced portfolios has varied between three and five - without Delphine we will be dividing the portfolios between the remaining four managers.

While it is always sad to say goodbye to people of Delphine’s calibre, we believe that our pipeline of talented analysts puts us in a strong position to continue adding value to your investments.

Stock market investing

Investors often have stories to tell about individual equities, sectors or even entire countries. Stories are great, but according to Andrew Lapping, when it comes to investing one has to be careful not to be sucked into the headlines. At the end of the day, it is not the story that counts, but the price you pay.

Jonathan Brodie and Trevor Black, from our offshore partner Orbis, echo this point. They note that while we do not believe it is possible to predict (let alone control) political or economic outcomes, we can fully control what shares we buy and the price we pay for them. Orbis and Allan Gray work hard to find stocks that look compelling, analyse them in the context of a consistent philosophy, and build a concentrated portfolio of the best ideas.

Our service commitment

We are unashamedly obsessive about providing you with excellent client service and hope that if we fall short of these standards you will complain. Your feedback enlightens us about what we need to change to make it easier for you to do business with us. Michael Summerton elaborates in his piece, and we invite you to be in touch.

Sincere thanks for your ongoing support and I wish you well in 2012

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