The image title
Quarterly Commentary

2023 Q1 Comments from the Chief Operating Officer

This year marks 50 years since Allan Gray began offering investment management services in South Africa. The local unit trust industry was in its infancy, and Allan, having recently returned to South Africa from the US, was determined to introduce professional investment management to the country. He later noted: “My objective was to try and make a difference.” 

Our golden jubilee gives us a chance to honour the roots that hold us steady, the track record we have grown and nurtured, the dedicated employees who give their all every day, and you, our clients, without whom there would be no business. We appreciate the trust and confidence you place in us.  

Our founding principles have provided a consistent framework that has helped us navigate dynamic global and local investment environments through the years. From the gold crash in 1982 to Black Monday in 1987, the Asian financial crisis of 1997, the dotcom bubble in 1999/2000, the global financial crisis of 2007/08 and, more recently, the impact of COVID-19 and the Russia-Ukraine war, we continue to apply the same investment philosophy in managing your portfolios.

The current investment context 

The local and global investment environments continue to be challenging. At the Monetary Policy Committee meeting in March, the South African Reserve Bank raised rates by a higher-than-expected 50 basis points in its efforts to cool inflation. While this means that the South African money market is fast becoming a saver’s haven, local businesses and consumers are feeling the pressure, compounded by the costs of the electricity crisis. Companies are reallocating billions of rands towards alleviating the impact of loadshedding. Invariably, part of these expenses is absorbed through the narrowing of corporate profit margins, which will ultimately bleed into lower tax revenue generation, and a portion is passed along to the consumer in the form of higher prices. Government’s prospects for debt stabilisation and the growth outlook are at risk until such time as energy reform can bear fruit, as Thalia Petousis explains in her context-setting article.

The power of compounding 

As an active investment manager, we recognise the compounding power of doing slightly better than the market over time. This has a material impact on long-term outcomes – in both investments and, interestingly, professional tennis. In comparing the two disciplines, Radhesen Naidoo discovers how a marginal 1% difference in performance can result in meaningful long-term success. He discusses this in a fascinating piece of analysis. 

Valuations matter 

The impact of the decline in global banking shares following the collapse of Silicon Valley Bank has had the market questioning whether the US Federal Reserve will pause its interest rate hikes, and possibly even cut rates, rather than persist in its fight against inflation. Equity markets have responded as if we are heading back to the low-inflation, low-rates environment of the past 15 years, and investors seem to believe that the playbook of the last cycle will continue to produce wins. 

Our golden jubilee gives us a chance to honour the roots that hold us steady … we remain focused on creating long-term wealth for you, and on making a real difference to society in the 50 years to come. 

Our offshore partner, Orbis, believes it might be dangerous to assume that the investing landscape over the next 20 years will be similar to that of the recent past. In his article, Alec Cutler walks us through the previous megacycle, touches on the current cycle and explains how Orbis is positioned to take advantage of the opportunities on offer.  

A key message that comes through from the Orbis commentary is the importance of focusing on valuations. This sentiment is echoed in Siphesihle Zwane and Varshan Maharaj’s article on the tobacco industry. They note that, while there have been significant changes in this sector over the last decade, with a pronounced shift towards vapour and tobacco-heating products, the attractive aspects of tobacco economics still hold. Cheaper valuations should compensate for increased uncertainty and risk. 

These two investment pieces reflect how our and Orbis’ research-intensive approach, combined with a longer-term outlook, allows us to buy great businesses at low valuations, especially in times of heightened uncertainty. As Alec concludes, if valuations are any indication, it is an exciting time to be a contrarian. 

Our Stable Fund: Balancing stability and growth 

Long-term data reveals that investment portfolios often require an equity component to ensure long-term real – above-inflation – returns. In recent years, partly due to the ongoing turmoil in the markets, we have witnessed some investors shying away from equity exposure, including low-equity funds like the Allan Gray Stable Fund, and rather opting for unit trusts that have little to no equity exposure. Martine Damonse discusses why our Stable Fund, with its proven ability to manage asset allocation through a bottom-up process while taking advantage of equity, fixed interest and offshore opportunities, remains a relevant option for the more risk-averse investor.  

It is easy to get distracted 

It is important to remember that returns are not achieved in a straight line, and that there is a trade-off: short-term volatility for longer-term returns. Staying the course to realise returns over the longer term means not getting distracted by the short-term noise or falling victim to common behavioural biases and investing mistakes. This is often easier said than done. In this quarter’s Investing Tutorial, Thandi Skade explores the opportunity cost of failing to stick to your long-term investment plan and how you can avoid paying behavioural penalties. 

As we celebrate our 50th anniversary, we are mindful of the collective efforts of individuals past and present in building our long-term track record. The journey continues as we remain focused on creating long-term wealth for you, and on making a real difference to society in the 50 years to come. 

Thank you for your ongoing trust and confidence.

Select a site

The financial services, products or investments referred to on this website are not available to persons resident in jurisdictions where their availability or distribution would contravene local laws or regulations and the information on this website is not intended for use by these persons. This website is for information only and does not in any way constitute a solicitation or offer by Allan Gray Proprietary Limited or any of its associates or subsidiaries (collectively “Allan Gray”) to buy or sell any financial instruments or to provide any investment advice or service.

By selecting one of the countries below I confirm that I have read and understood the above and that:

(a) I am not a South African citizen; or 
(b) I do not reside in the Republic of South Africa; or 
(c) I am not otherwise a person to whom the communication of the information contained in this website is prohibited by the laws of my home jurisdiction; and 
(d) I am not acting for the benefit of any such persons mentioned in (a),(b) and (c) and 
(e) I confirm that any investment with Allan Gray is based on my own initiative and not due to any offer or solicitation by Allan Gray.