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Quarterly Commentary

2020 Q3 Comments from the Chief Operating Officer

As the economy opens under lockdown Level 1, we are starting to see a return to normality, while keeping a close watch on what is happening around the globe. We proceed, cautiously optimistic, as we reacquaint ourselves with the activities that we enjoy. Lockdown has been a time of forced reflection and the question is, will we use this to drive changes or will we procrastinate? 

A lesson from Ancient Greece

Human beings have been procrastinating for centuries. While current thinking attributes this to laziness and lethargy, the ancient Greek philosophers believed the problem ran much deeper – blaming it on human nature. They coined the term for this “akrasia”, which comes from words meaning “lack of” and “power”. Akrasia is the state of acting against your better judgement; it is what prevents you from following through on what you set out to do. 

But before you feel better about procrastinating knowing that people have fallen victim to this habit for hundreds of years, perhaps it’s worth mentioning that the philosophers came up with another term as the antonym of akrasia: “enkrateia”, which means “power over oneself”. According to author James Clear, one of the steps towards living a life of enkrateia, rather than one of akrasia, is learning how to delay gratification. He says this will help you bridge the gap between where you are and where you want to be.

Sitting tight has not been easy

This is very true for most things in life, but particularly in investing. Enkrateia can help you resist the temptation to spend when you planned to save. It can also help you resist the urge to make changes to your investment when perhaps it would do you better to sit tight – hard as it may be, as we have learnt over the last few months. 

Sitting tight has not been easy. Many investors faced with a highly uncertain environment have dumped volatile equity investments in search of the stability of fixed-income assets, even as interest rates head south. And while locking in losses may seem irrational, acting in the moment gives us a sense of control and makes us feel better. Some have claimed they simply can no longer tolerate the risk. Marise Bester discusses the concepts of risk tolerance and risk perception as she seeks an explanation for why we act the way we do. She also offers some tips to help us improve our behaviour so that our response to perceived risk does not have a detrimental impact on our investment outcomes. 

It is understandable that investors are questioning their equity investments as lower-risk investments, like bonds and money market funds, have outperformed over the last few years. But the evidence over longer periods shows that equity real returns are rarely negative, while fixed income can produce negative real returns during times of increasing inflation. It is therefore important for risk-averse investors to balance the protection provided by the majority of assets being invested in cash and bonds with an appropriate amount invested in equities to generate potential higher real returns. The Allan Gray Stable Fund was launched 20 years ago to fulfil this exact need. Sean Munsie looks at the Fund’s positioning, performance and prospects. 

Money-printing in overdrive

Akrasia is not just a problem at the investor level; central banks across the globe could perhaps benefit from strengthening their enkrateia muscle. The United States, Europe and Japan seem to have abandoned any sense of traditional financial prudence, increasing their balance sheets at a rapid rate to cope with the COVID-19 pandemic and the consequences of lockdown measures. In his piece this quarter, Sandy McGregor discusses modern monetary theory and its longer-term unintended consequences, which he believes pose a grave risk to the financial stability of the global economy. 

Investment ideas

We have two interesting pieces this quarter that illustrate our investment philosophy and process, which we share with our offshore partner, Orbis. One of these pieces looks at the investment case for Naspers, a key holding in many of our, and Orbis’, portfolios. While Naspers is a South African company, its largest underlying asset is Chinese technology giant Tencent. It helps to have a global perspective when getting into the detail of the opportunity. Ruan Stander, from Allan Gray, and Stefan Magnusson, from Orbis, collaborate to share their insights. 

Sticking with technology, and the world’s voracious appetite for connectivity and computational power, Alec Cutler unpacks Orbis’ enthusiasm for Samsung and Taiwan Semiconductor Manufacturing Company. Orbis is very keen to tap into society’s ever-increasing need for connectivity, but in their hunt for opportunities at the right prices, they prefer to avoid the lofty valuations of the US tech giants. 

Thank you for your ongoing trust

You have trusted us with your hard-earned savings, and we recognise that at times like these, when our performance is disappointing, trust can easily be eroded. Many of you may be wondering how to assess whether your trust is wisely placed. In this quarter’s Investing Tutorial, Nomi Bodlani and Tamryn Lamb suggest some questions you can ask to check your thinking.

periods of underperformance are a normal and expected part of the cycle

While periods of underperformance are a normal and expected part of the cycle, knowing this doesn’t make them any easier to endure. Global trust expert Rachel Botsman notes: “Whom we choose to trust is one of the most important issues of our time.” We do not take your trust lightly. 

Keep safe and well.

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