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Quarterly Commentary

2022 Q3 Comments from the Chief Operating Officer

The rising cost of living and doing business around the world as a result of escalating energy prices and interest rate hikes is creating unease. Investors are on edge, wondering what will happen and how they should position their portfolios, given the level of uncertainty economically as well as politically.

As investment managers, we do not have any special power to determine what the future holds – we don’t know whether inflation will settle or what GDP growth will look like. What we do know, however, is that in times of negativity, investment opportunities typically emerge. It is up to us to maintain focus and, through our rigorous investment research, find such opportunities.

Understand the investment context

In her piece this quarter, Thalia Petousis examines the consequences of the extended periods of low interest rates and the resultant mispricing of money. She explains the link between inflation and rising interest rates, coupled with global supply chain disruptions and energy shortages. 

Thalia’s piece may leave you wondering how the global economy, built on a foundation of cheap money, endured for so long.

Face up to the risks in investing

The risk of losing money is the main risk that we are concerned about and that we actively manage when it comes to investing your money – we care about helping you create and preserve wealth over the long term. As your investment manager, we manage our unit trusts according to our investment philosophy and in line with their respective mandates.

The risk of losing money is the main risk that we are concerned about and that we actively manage when it comes to investing your money …

As the investor, it is important to understand the unit trust you are invested in and to ensure your choice matches your risk profile and investment objectives. In this quarter’s Investing Tutorial, Lydia Fourie guides us through some of these considerations, and explains how the ups and downs of investing smooth out over time.

Alignment matters

While it is important to ensure that your expectations and investment objectives are aligned with the unit trusts you are invested in, it is also critical to ensure that we, as a business, are aligned with growing your wealth over the long term. Saleem Sonday unpacks the principles behind how we are structured as a business. He explains our obsession with aligning your interests as a client with our own, and how this guides our preference for performance-based fees, which reward us when we deliver on our commitment to you, but also ensure we share in the pain through lower fees when we do not.

Guard against overpaying

One of the best ways not to lose money when it comes to investing is to make sure you don’t pay too much for an asset. At Allan Gray, we follow a valuation-based investment approach, which means that we invest in companies that trade at a discount to our assessment of their intrinsic value. We sell these companies when they reach our assessment of their true worth. This doesn’t stop us from investing in growth companies, but we are conscious of overpaying for “blue sky” potential, which is often baked into the valuations of companies that are growing very quickly. History is littered with fast-growing companies that were overpriced and subsequently delivered poor shareholder returns when they failed to live up to the market’s expectations. However, sometimes, these high valuations are warranted as the company meets and sometimes exceeds these lofty expectations. Capitec is one such incredible story for us to learn from, as Pieter Koornhof discusses.

One of the best ways not to lose money when it comes to investing is to make sure you don’t pay too much for an asset.

The raging dollar

We have experienced the rand weakening by almost 11% against the US dollar this year. However, such weakness has not been unique to our local currency – the dollar has been incredibly strong against almost all currencies. The British pound has lost almost 18%, the euro almost 14% and the Japanese yen 20% against the dollar this year.

Currency movements are notoriously difficult to predict over the short term, and currency cycles are generally long and noisy. Over the long term, our offshore partner, Orbis, believes that exchange rates should tend towards purchasing power parity. It is therefore no surprise that, given the rally experienced by the US dollar this year, Orbis’ view is that it is looking highly overvalued. Alec Cutler unpacks the reasons behind the dollar’s strength and explains why the Orbis SICAV Global Balanced Fund has an underweight exposure to the dollar when compared to its benchmark. 

Retirement reform update

For many South Africans, their retirement savings are their biggest asset. However, South Africans have generally not been good at preserving this asset, which has a direct impact on the quality of their retirement. Richard Carter discusses the proposed changes to South Africa’s retirement fund system stemming from the National Treasury’s announcement in February last year of its intention to allow limited access to retirement savings to help savers cope with short-term emergencies. We believe the planned “two-pot retirement system” is a positive step towards meeting short-term needs and enhancing the long-term accumulation of benefits for retirement.

Thank you for your trust.

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