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Quarterly Commentary

2023 Q3 Comments from our chair

Daimler-Benz introduced the Mercedes-Benz S-Class to South Africa in 1973 – the same year that an ambitious 35-year-old with a Harvard MBA and eight years of experience with the renowned Fidelity Investments returned to South Africa from the US and founded our firm. A fortunate few could buy the Mercedes-Benz 280 S Auto for just under R10 000 in 1974, when Car magazine described it as a vehicle incorporating the “latest concepts in styling, mechanical and safety engineering, and aerodynamics” of “breath-taking beauty and refinement … in a class of its own”.

A far better idea would have been to invest that R10 000 in a South African equity portfolio with Allan Gray and not touch it again, in which case you would have been able to buy around 60 to 70 Mercedes-Benz S 500s today. Alternatively, R10 000 could have bought 100 Krugerrands in 1974, but if it had instead been invested and compounded in this equity portfolio, it would now buy around 5 000 Krugerrands.

A bumpy ride

Of course, our clients need no introduction to the power of compounding. The maths is simple, and it all looks so easy in hindsight. But, as many of you will know, the path to these exceptional long-term returns has been difficult and bumpy. On six separate occasions, the Allan Gray equity portfolio suffered a major loss in value (between 29% and 43% in inflation-adjusted terms), and it took two to four years to recover the losses. On these occasions, our conviction and our clients’ patience were severely tested.

I believe we are well placed to confront … future challenges with humility and confidence when they do arise.

Although I am reluctant to make forecasts, one I can make with confidence is that we will inevitably have to withstand more trials like this in the future. As the standard investment industry disclaimers state, the price of equity investments can go both up and down. To make matters more challenging, the market can take a different view from us on any company’s valuation for an uncomfortably long time, even if we are ultimately proven right. And, of course, we are not always right – a success rate of just 60% is normally enough to make for exceptional long-term portfolio returns. A success rate of 50% makes you average.

When we suffer through extended periods of poor performance, it is natural for clients to question whether our investment philosophy or process has become outdated, or the quality of our research has declined, or our people are failing to live up to the standards of their predecessors, or we have become complacent and lost our edge. I believe we are well placed to confront these questions and future challenges with humility and confidence when they do arise.

Our founder, Allan W B Gray, set firm foundations in the form of guiding values and principles and a stable long-term ownership structure …

The roots that hold us steady

Our founder, Allan W B Gray, set firm foundations in the form of guiding values and principles and a stable long-term ownership structure through Allan & Gill Gray Foundation. Some may find this ironic, but one of these principles is an acceptance that our firm should fail if we fail to add value for clients over the long term. Our clients are free to move their funds elsewhere. Allan saw what others may see as a vulnerability, as a source of strength. We cannot afford to become complacent, and each new day we are motivated to serve our clients well.

It is daunting to be a custodian of a firm with a 50-year history of excellence, but I am fortunate to be able to share the responsibility with a strong and supportive board and an excellent leadership team capably led by Mahesh Cooper and Duncan Artus. Mahesh, Duncan and I all joined Allan Gray over 20 years ago in junior roles, and it is encouraging to observe the growth of the many capable young people in our firm who will become its leaders.

When reflecting on the last 50 years, we should remember that the global backdrop for investors has been extraordinarily favourable. The S&P 500 is up 67 times since its low in 1974, the dollar gold price up 12 times over the same time period, and bond yields have declined inexorably for four decades (until recently, that is). I think it would be rash to expect a similar tailwind from global asset market returns starting from today’s valuations. There may even be some strong headwinds.

We hope that we can help to make a positive difference.

Open to possibility

On the other hand, many South Africans have tragically had scant opportunity to reach for their full potential over the last 50 years (and prior to that too). We have such enormous potential as a country, and we waste so much of it. It does not have to be this way, and working effectively together to empower more South Africans could turn this headwind we have been battling into a strong tailwind. We hope that we can help to make a positive difference.

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