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Quarterly Commentary

2021 Q3 Comments from the Chief Operating Officer

Even as vaccine roll-outs gather pace globally, and some countries begin to open up, the “what happens next?” question looms large. According to the World Economic Outlook, published by the International Monetary Fund (IMF), the global recovery is split into two groups: those who can look forward to further normalisation of activity following mass roll-out of the vaccine (almost all developed economies), and those who will still face resurgent infections in the face of slower vaccine programmes. However, as long as the virus circulates, the road to recovery remains uncertain for all.

A World Bank report echoes these sentiments, noting that while the global economy is poised to stage a recovery (although recent surveys are somewhat less bullish than those at the start of the year), the rebound is expected to be uneven. According to the report, emerging market and developing economies will suffer the long-term effects of a pandemic hangover – including erosion of skills from lost work and education, and the burden of debt.

In South Africa … there are some green shoots of hope as mining and agriculture prosper

In South Africa, despite the ongoing uncertainty and prevailing negative sentiment, there are some green shoots of hope as mining and agriculture prosper. Meanwhile, tax collections are rising, we are showing a current account surplus for the first time since 1994, and business conditions are slowly improving. Some reasons to be cheerful.

Focus on tangible facts

This, perhaps, all goes to show that trying to guess what will happen next is a fool’s errand, and basing investment decisions purely on macroeconomic predictions can be problematic. At Allan Gray, we prefer to ground our investment decisions in fact and thorough research, hunting for companies that are undervalued by the market and likely to reach our estimate of their true value. In our view, the biggest risk investors face – regardless of macroeconomic circumstances – is paying too much for an asset.

But this doesn’t mean that macroeconomic questions don’t weigh heavily on investors’ minds, along with other related questions on risk and opportunity, and environmental, social and governance factors. Tamryn Lamb draws on insights from experts across the business in an attempt to answer some of the common questions clients are asking.

Of course, we are not suggesting that one should ignore the broader context; you do so at your peril. Rami Hajjar demonstrates this using Lebanon’s financial collapse to illustrate how things can go wrong at a country level. This acts as a valuable lesson for our thinking when approaching investment opportunities in African and frontier markets. While South Africa is in a very different position to Lebanon, the events outlined also act as a reminder of the importance of sound economic policy, fiscal discipline, and strong, independent institutions.

Portfolio positioning

In a world where uncertainty continues to be a key theme, investors should position their portfolios for multiple outcomes. This may mean including bonds. What is interesting at the moment is that emerging market bonds are offering exceptional yield, but you need to be willing to take on a fair amount of risk.

Developed market bonds, on the other hand, seem to be more popular, despite not offering investors much in the way of return. Most developed market government bond yields have fallen towards zero, and some are even negative, such as those of Germany and Switzerland. This exposes investors to other risks often underestimated: the risk that your investment will not keep up with inflation, and the risk that any interest rate increase will further reduce yields.

It’s important to understand the relationship between risk and return in the fixed income context. Londa Nxumalo discusses factors to consider when looking at the opportunities and threats across jurisdictions, while Mark Dunley-Owen, from our offshore partner, Orbis, weighs in with a global perspective.

Staying global, but turning to equities, we investigate the reasons behind Orbis’ painful third quarter. After an encouraging start to the year, performance has been impeded by exposure to selected Chinese technology shares and the broad underperformance of value-oriented shares globally. John Christy, from Orbis, discusses the reasons behind the underperformance and explains why Orbis is optimistic about its current holdings.

Investing for retirement

Economic uncertainty and market volatility can make us feel we should put off saving for retirement until the picture is more certain and things improve. Already many of us grapple with balancing our future wants and needs, and the uncertainty may give us an excuse to shift priorities. However, time is a key ingredient in investing and delaying saving for retirement can leave our future selves out of pocket. While we get this intuitively, long term is typically easier to believe in than to accomplish. Our guest writer, Morgan Housel, a partner at Collaborative Fund (US) and an expert in behavioural finance and investing history, explains what you have to come to terms with to do long term effectively.

time is a key ingredient in investing and delaying saving for retirement can leave our future selves out of pocket

But balancing the friction that exists between our present and future wants and needs is a real challenge. In this quarter’s Investing Tutorial, Thandi Skade examines how “temptation-bundling” and reframing how we identify with our future selves can help us make better decisions and foster habits which promote better investment outcomes.

Orbis leadership appointments

I’d like to update you on some leadership appointments at our offshore partner, Orbis, which will become effective on 31 December 2021.

William Gray will hand over the day-to-day leadership of the firm to Adam Karr, who will lead the investment team while continuing in his role as a portfolio manager, and Darren Johnston, who will lead the business team. Adam will serve as president and portfolio manager and Darren will serve as chief operating officer. Both will report to the Orbis Holdings Limited Board.

Both Adam and Darren have had a long involvement with Orbis. Adam joined Orbis in 2002 and currently leads the US investment team and is one of the stockpickers who direct client capital for the Orbis Global Equity Fund. He has also served on the Orbis board for 15 years. Darren joined Orbis in 2016 after being CEO of PwC in the Caribbean. He has over 30 years of experience in the financial services industry. He has worked closely with William, the Orbis Holdings Limited Board, and other leaders in managing and setting the strategic direction of the business.

William will remain closely involved. He will be appointed as chair of the Orbis Holdings Limited Board, continue as chair of the Orbis Funds and maintain his existing directorships of the other asset managers in the Allan Gray and Orbis group, including his position on the Allan Gray Proprietary Limited Board. William will also actively support Orbis, Adam and Darren through the transition and beyond.

The Gray family will continue to serve as councillors of the Allan & Gill Gray Foundation, the majority owner of the various asset management businesses, which was established in 2015 to promote the commercial success, continuity and independence of the group, and to ensure that the distributable profits the Foundation receives from these firms are ultimately devoted exclusively to philanthropy.

This opportunity to refresh the leadership is a product of careful planning and a direct result of Orbis’ ongoing process of developing leadership talent. Coupled with attractive investment prospects ahead, Orbis is excited about this transition and the potential for it to create further opportunities across the firm for others to step up and make a greater impact.

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