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Quarterly Commentary

2020 Q4 Comments from the Chief Operating Officer

There seem to be fewer articles in mainstream media this year encouraging people to set goals for the year ahead. With COVID-19 prevailing, it feels less like we’ve started a new chapter and more like we are stumbling through the appendix. The content that has been produced has a different theme: Absent are the long-term aspirational goals; the messages are focused squarely on getting through the next few months. Perhaps this is because many of our 2020 goals went out the window as the pandemic set in, reminding us that despite our best intentions, something unexpected can land in our path and stop all progress.

Short-term goals unquestionably have their place; they help us set and achieve milestones, make progress, deal with crises and rapid change, and achieve momentum towards more long-term goals. Long-term goals seek to attain more significant, transformational changes; they will take longer to achieve, and can be difficult to quantify in advance.

People often set long-term goals for themselves by envisioning what they want to be doing in the future, and use short-term goals to get there. In the context of the pandemic, it’s naturally hard to think about what the long term may look like when the short term is so unclear.

history has shown that this, too, shall pass

But history has shown that this, too, shall pass. Many have drawn parallels between COVID-19 and the Spanish flu pandemic of 1918, which infected around 500 million people worldwide and killed an estimated 20-50 million. At the time, there were no effective drugs to treat the virus. Much like today, people were ordered to wear masks, and schools, entertainment areas and businesses were shut. By 1920, the pandemic subsided as transmission came under control and populations developed herd immunity. While the virus didn’t disappear, it morphed into a seasonal flu, and the roaring ’20s kicked into gear. 

Current market levels demonstrate how things can and do change, with the FTSE/JSE All Share Index (ALSI) reaching historic highs in January this year. As Duncan Artus, our chief investment officer, points out: Last March or April, if we had said the ALSI would outperform cash and inflation for the calendar year 2020, it probably would have been met with much scepticism.

Market extremes by their very nature do not persist forever, and they do present opportunity. Trading successfully on short-term news flow is incredibly difficult. What ultimately determines long-term returns is valuation, which requires buying cheap assets. 

Maximise tax benefits before end-February

It is wise not to let the weight of a COVID-19-affected world detract from your longer-term intentions and abandon your planning for the future, particularly when it comes to your physical and financial health. 

If you are looking to make strides in your future financial security, a good starting point is maximising the tax benefits the government offers for investments in retirement products and tax-free investment accounts. Of course, it is also important to understand how these products work and to use them correctly. In our Investing Tutorial this quarter, Tamryn Lamb and Twanji Kalula elaborate on this topic.

Saving for retirement, and preserving your retirement savings along the way, are key to having enough when you eventually decide to retire. Legislation has recently been changed to complete the alignment of provident and provident preservation funds with pension, pension preservation and retirement annuity funds. This is part of the National Treasury’s broader retirement reform initiative, which aims to encourage increased saving for retirement and to enhance the preservation of retirement fund benefits so that retirement fund members are able to provide a better income for themselves in retirement. Shaun Duddy discusses

The impact of the US election

While COVID-19 has dominated conversation, the situation in the US is not far behind, as the world’s most established democracy experiences problems. As the largest equity market and economy, the powerhouse of technical progress, and with the US dollar being the world’s reserve currency, what happens in the US is highly relevant to all investors. Sandy McGregor shares his view.

Finding value

Staying global, we share the annual letter of William Gray, president and head of investments at our offshore partner, Orbis. Will reflects on a difficult year and reaffirms his conviction in the team’s ability to add value for clients. Our and Orbis’ shared investment approach struggles when cheap stocks get cheaper and expensive stocks get more expensive, but tends to thrive when share prices converge back towards fundamental value. We have seen some encouraging movement in the right direction over the last couple of months as valuation gaps begin to close.

On the theme of measuring value, Kamal Govan looks at the drivers of holding company discounts, reflecting on the risk and opportunity. We own several holding companies, such as Naspers, Remgro, Reinet, RMI and PSG. These are trading at historically large discounts to their underlying investments and we believe these discounts potentially add to the margin of safety within our portfolios.

Resilience is key

Psychologists define resilience as the process of adapting well in the face of stress and adversity. Yogavelli Nambiar, from the Allan Gray Orbis Foundation, believes resilience is a quality we need as a society, not only to survive a changing global landscape, but also to be able to learn, build and innovate. The Foundation Fellows, and the staff of the Foundation itself, have demonstrated incredible resilience over the past year and have many notable achievements to show for it. Yogavelli discusses these.

Farewell to Ruan Stander

I would like to pay tribute to one of our portfolio managers, Ruan Stander, who will be leaving us at the end of February to focus on personal interests, including personal investments. Ruan joined Allan Gray in 2008, became a portfolio manager in 2012, and started to manage a portion of the Balanced and Equity funds in 2015. He is a natural contrarian thinker, with good insights and has been a valuable member of the investment team. We wish him all the best.

Our investment process relies on multiple portfolio managers, each making individual decisions. A strength of this model is that it facilitates succession and a seamless transition of responsibilities. In this case, Ruan’s responsibilities will be allocated across the existing portfolio managers.

I would also like to take this opportunity to express sympathy to those of you who may have lost family members and friends, and to wish those of you who are currently battling the virus a speedy recovery. Thank you for your ongoing support and all the best for the year. Stay healthy and safe.

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