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Quarterly Commentary

2016 Q4 Comments from the Chief Operating Officer

The Cape Town traffic can be quite frustrating. Mountain biking is fun. Combined, these two facts make commuting on a bicycle along Table Mountain’s gravel tracks a logical choice if you live here. The problem is that in the summer, when it is light early enough to ride to work, the wind blows incessantly. This is good when there is a tailwind, but very unpleasant when it buffets from the side or blows from the front.

2016 was a tough year for South African investors. There was no wind from behind to help us along in local equities or property and, when priced in rands, no tailwind in foreign equities or international bonds either. Investors in South African bonds were rewarded with double-digit returns in 2016 (15.4%), but they had a very nervous time thanks to terrible politics and sceptical rating agencies. Contrast this with the 10 years from 2005 to 2015, when the average balanced fund manager, combining these asset classes in a moderate risk portfolio, beat inflation by 5% largely thanks to helpful tailwinds from local and international equities. In 2016 the same balanced funds returned a measly 1.2%, way behind inflation. Our Allan Gray Balanced Fund was more than 5% ahead of its benchmark for the year, which helped improve the picture for many investors. But we can’t be too happy with our relative victory since we didn’t create any real wealth; we were marginally behind inflation.

This may be pushing the analogy a bit, but active managers like us have handlebars to steer and pedals on our bicycles. I admit that these require skill, but they are very useful when the wind isn’t blowing in your favour. Passive funds make no attempt to stand or counter the market’s buffeting, so although they look good when the wind is blowing in the right direction, they also tend to do less well when it isn’t.

Performance of our unit trusts

I am pleased to report that, to the end of 2016, our Equity, Balanced and Stable Funds all beat their benchmarks over three, five and 10-year periods. 2016 was also an unusually good year for our offshore partner Orbis, with the Orbis funds outperforming their benchmarks by an asset-weighted 7.6% after all fees and expenses. This benefited our unit trusts that have offshore exposure (although rand strength tempered this somewhat).

The tables at the end of this magazine show performance over different periods for all our mandates. While good historic performance is always pleasing, remember that you are now invested for future performance.

Understanding the context in which we invest

Although the economic and political landscapes are not major considerations for our stock selection, it’s important to understand the context in which we must invest. Time can give us perspective as we get used to a changing world and try to understand the reasons for the unexpected events and the implications of these events for the future. It also helps to look back over history. Sandy McGregor provides some perspective as we begin 2017 with the global political landscape looking very different. 

Application of our investment philosophy

This quarter, Alec Cutler shares some details about the Orbis Global Balanced Fund. This is an important Fund for our unit trust investors. If you are invested in the Allan Gray Orbis Global Fund of Funds, the Orbis Global Balanced Fund makes up around 75% of your portfolio, it makes up 9% of the Allan Gray Balanced Fund (35% of its offshore allocation) and 15% of Stable (60% of its offshore allocation).

Global Balanced aims for both capital appreciation and income generation, balanced by the risk taken to achieve each. Alec explains why Orbis isn’t currently buying the highest yielding shares, since these are now priced at a level that makes these ‘low risk’ investments unusually risky. He points out that, for Orbis and Allan Gray, in every mandate we manage, we base investment decisions on whether a security offers a discount to our assessment of its intrinsic value, and whether holding it will improve the portfolio’s overall balance of risk and return.

Alec also briefly touches on the investment case for US lender Wells Fargo. Moving back on to home soil, Ruan Stander looks at the investment case for hospital operator Life Healthcare. Both these examples illustrate how negative sentiment can push share prices down. Ruan explains why we believe negativity can create opportunity for long-term investors like us to earn attractive returns.

Get your tax breaks now

Every year ahead of the end of the tax year in February, we remind investors to think about taking advantage of some of the incentives the government has put in place to encourage us to save. In March 2016, the amount you can contribute to your retirement funds tax-free was increased from 15% to 27.5% of the higher of taxable income or of remuneration, capped at R350 000 per year. On top of this, in March 2015 the government introduced a tax-free savings product to encourage us to save our after-tax money. You can invest R30 000 per year (up to a maximum of R500 000 over your lifetime) and benefit from growth free of dividends tax, income tax on interest and capital gains tax.

If you haven’t taken full advantage of these tax incentives I encourage you to read Carla Rossouw’s piece to learn more, and to take action ahead of the end of the tax year on 28 February.

All of our tax-incentivised vehicles use unit trusts as their underlying investments. While there is an overwhelming number of local unit trusts to choose from, once you have narrowed down your choice, factsheets provide a comparable summary. In this quarter’s Investing Tutorial, Ray Mhere explains how to read a factsheet, which is an essential part of your research and should help you make smarter investment decisions, with the help of your financial adviser if you use one.

Foundation update

The Allan Gray Orbis Foundation’s mission is to cultivate the entrepreneurial mindset of young people. We are very inspired by the Fellows from the Foundation who have gone on to establish businesses. In Zimkhitha Peter’s update this quarter, she shares some of the Foundation’s successes in the face of a difficult year for tertiary education.

Thank you for trusting us with your savings and best wishes for 2017 from all of us at Allan Gray.

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