This year marks 45 years of investing our clients’ hard-earned savings. The milestone provides an opportunity to reflect on our past, and we use these insights to continue delivering on our promise to create long-term wealth for our clients.
Allan Gray was founded in 1973 when Allan W B Gray returned to South Africa after working for an asset management firm in the US. His philosophy was simple: Pursue superior long-term returns for clients, without taking undue risks. We have adhered to our founder’s values for 45 years, and they have served our clients well through an ever-changing investing landscape.
Reflecting on our history reveals uncomfortable periods when our courage and conviction have been tested. Our worst period of underperformance to date occurred between 1997 and 1998, during the height of South Africa’s tech and financial bubble. Our equity portfolio, which was overweight in resource and property shares, lagged behind the FTSE/JSE All Share Index (ALSI) by 18% over a rolling 12-month period. During that time, we lost a large number of our clients. However, we believed that large portions of the market were extremely expensive and did not want to risk our clients’ capital by following the herd. This was not easy, but we firmly believed we were acting in our clients’ best interests.
The tide eventually turned in October 1998 when the tech bubble burst. The market recognised the significant value in the depressed commodity and property shares, and Allan Gray went on to deliver its best year of outperformance in 1999. That period, and indeed the commodity super cycle peak and global financial crisis of 2007/8, are burned into the DNA of the investment team and the business principles of the firm.
Conviction is key
We can’t predict when the next bubble will occur. However, we work hard to ensure that the business is resilient and that the investment team can maintain a contrarian view in which they have high conviction. To this end, we ensure that our investment process is as effective as possible. Here are some examples:
- Reducing the noise
The modern world is inundated with information that is readily available at the click of a mouse. This creates a state of mind that was appropriately characterised by Spanish sociologist Manuel Castells as “informed bewilderment”. What we try to do in the investment team is to increase our signal-to-noise ratio. There is so much noise coming in that one needs a strong filter to sift out the important factors that ultimately determine the value of an asset. One of the ways we do this is to vote on potential investments ahead of our policy group meetings, which are held regularly between analysts and portfolio managers to interrogate potential investments. This ensures that external forces do not influence our vote.
- Diversity of thought
We mitigate against the danger of "group think" in investing by encouraging diversity of thought within the investment team. A good illustration of the importance of this was when we sold our holding in diversified food group AVI after it purchased fashion retailer, Spitz. While our investment in AVI had been a successful one, we incorrectly believed they had overpaid for Spitz. We underestimated the willingness of Spitz’s clientele to pay a high premium relative to their income for luxury shoes. If we had had more diversity of thought in the team, it is possible we would have understood the business better. We are working hard to find and develop a diverse pool of talent.
The investment team has increased its interactions with our offshore partner, Orbis, not only because they manage our offshore assets, but also because of the internationalisation of our market: Some of the biggest shares on the local market, such as Naspers, Richemont and BHP Billiton, have considerable offshore exposure. We can tap into the respective Orbis teams for a local insight into offshore markets. For example, if we are trying to understand Naspers’ stake in Chinese technology company Tencent better, we will spend time interacting with the Orbis Emerging Markets team who are based in Hong Kong and who understand the Chinese market better than we do.
We were among the first investors to make use of hedging in our balanced portfolio by selling index futures that give exposure to price movements on the underlying index. Hedging allows investors to profit from the price movements of a basket of equities without trading the individual shares. We used hedging in both 2001/2002 and 2007/2008, by selling index futures to reduce the equity weighting in the portfolio, given that we believed our shares were cheap – despite the overall market being expensive.
- Trading directly
Over the years we have tried to iron out inefficiencies in our investment process. One way in which we have done this is by using Direct Market Access (DMA) for trading. Instead of calling a broker to buy shares, we trade directly in the market using the broker’s algorithms. As a result, we have substantially lowered our clients’ trading costs, thereby increasing their net returns.
- Sticking to our mettle
What we have learnt in the past 45 years is that there isn’t just one way to invest successfully; however, once you decide on a style, you have to believe in it and stick to it, because the market will test you.
Sandy McGregor, who has been with the company for 28 years, provides sage advice on how to remain a good investor during the inevitable difficult cycles: “You need to be confident in your approach during the bad times, but remain humble during good times. If you start thinking that you are too clever, that’s when you begin making bad decisions.”
Our clients’ interests have always been and remain at the heart of our decisions. We will continue to work hard to keep your trust and confidence as we consistently apply our investment philosophy and process over the next 45 years.