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Quarterly Commentary

2017 Q1 Comments from the Chief Operating Officer

Turkey’s President Erdoğan has recently won a controversial referendum to expand his executive powers and extend his maximum term by 10 years. The UK is negotiating the terms of its departure from the EU. There is a new US government in place with a controversial agenda, South Korea’s president has been impeached and charged with corruption, and Brazil’s entire political leadership (bar the new president) remains engulfed in a corruption scandal that seems to have no end. The news is always full of things going wrong in other countries, but right now South Africa’s political uncertainty and economic woes seem like the norm rather than the exception.

Our problems may not be unique, but they matter a lot to us. The recent cabinet reshuffle and the resulting debt ratings downgrades have left us reeling. South Africans as a whole do not save (all extra savings each year are more than offset by extra borrowing), so the interest rate we pay when we borrow from overseas to grow our economy is very important.

In the first half of April, after the downgrades, the daily closing yield of SA 10-year bonds traded at an average of just under 9%, about 4% weaker in price terms than a week prior to the downgrade. On the domestic government bond issuance planned for the current 2017/18 financial year, this would equate to a rough R8bn increase in the cost of raising this debt. Things could be worse: the 2.5% inflation-adjusted risk premium for South African debt over US debt is still lower than the average premium we achieved throughout 2016. Compared with other countries, the unemotional weight of the bond market remains quite optimistic about SA’s ability to solve its problems.

There are reasons to be optimistic, not least of which is our robust, engaged democracy. But while optimism is a useful attitude for living, a dose of prudence is good for investing. In your Balanced and Stable portfolios we converted some of the foreign exposure back into rands at attractive levels in early 2016, but these portfolios remain at their maximum offshore allowance, allowing the portfolios to benefit from global returns uncorrelated with events in South Africa. Our top 10 equity holdings contain several well-diversified global businesses whose earnings are generated offshore. We also have investments in many solid local businesses that have proven that they can withstand shocks such as what we are going through. We will add to these if their share prices are impacted by a widespread sell-off of domestic assets.

We constantly reassess risk and make changes to your portfolios when we believe it is appropriate. Like the rest of the country, we will continue to monitor the situation.

A quick look at this quarter’s articles

Our spread of articles this quarter gives you a sense of how our investment philosophy is applied and how we hunt for the best opportunities for your portfolios. As Mark Dunley-Owen discusses in his analysis of bonds, we apply our investment philosophy and process across asset classes. We research the fundamentals of each security to determine its fair value, using sustainable cash flow as a core input. We buy when the price is below this fair value, and sell when the opposite is true. This applies to both equities and bonds. Mark explains that it is prudent to maintain bond exposure within diversified investment portfolios, and vary this according to your objectives and your view on relative risk and return.

While once-enthusiastic investors are doing what they can to get out of Africa, Andrew Lapping is using this mood to accumulate the shares of better Nigerian banks at bargain prices. In his article he talks us through this thinking.

Although there are bargains to be found in Africa, the same can’t be said of many developed markets, where shares currently look overvalued. Allan Gray and our offshore partner Orbis share the same investment philosophy and we both believe that the biggest risk investors face is paying too much for an asset. William Gray and Jeremie Teboul, from Orbis, explain Orbis’ perspective on the risk of loss in the current investment environment and discuss where they are finding value.

We are just a few weeks in from the announcement of tax changes and the national budget for this year. In her piece this quarter Carla Rossouw gives some examples of the real impact of the budget on your pocket and offers some pointers on how to deal with the pinch.

 We have recently launched an umbrella fund as we think we can offer a differentiated, transparent, cost-effective product in an otherwise opaque and expensive group savings space. Nazia Suleman and Saleem Sonday look at group savings in South Africa and describe our offering.

Deadline for Foundation applications is 12 May

You may be familiar with the work of the Allan Gray Orbis Foundation, which believes that entrepreneurially-minded individuals with ethical values and strong leadership skills hold the promise of change in this country. The Foundation believes that entrepreneurs can meaningfully improve the socio-economic landscape of Southern Africa. The Allan Gray Fellowship, offered by the Foundation, is one of the most comprehensive and stimulating university fellowship opportunities in Southern Africa. The Fellowship’s entrepreneurial and personal development programme runs throughout the academic year alongside Candidate Fellows’ university studies. The Fellowship includes full tertiary financial support and living expenses.

If you know an exceptional young person who is a budding future entrepreneur and goes against, behind and in front of the grain, please encourage them to apply for the Fellowship before the 12 May deadline. For more information please visit

We are living in uncertain times in South Africa. We will continue to do our utmost to deliver you the best possible return for your investments at the lowest risk of loss. 

Thank you for your trust. 

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