In this fund commentary, Duncan Artus discusses how the Allan Gray Balanced Fund has navigated a period of heightened market volatility and increasingly concentrated market returns. He reflects on the Fund's positioning, recent increases to positions in high-quality businesses and how it has indirectly benefited from rising investment in AI.
The Fund has returned 4.4% year to date, outperforming its benchmark by 3.8%. On a long-term basis, the absolute level of recent real returns is above what we would expect to deliver through the cycle. Long may it last.
Locally, the FTSE/JSE All Share Index (ALSI) is down 14% from its late February peak, amid a seemingly never-ending stream of geopolitical headlines that have manifested in increased price volatility, particularly among gold and platinum shares. What may be noteworthy for tenured investors is how precious metal shares have recently behaved more like risk-on assets. This runs counter to the notion that gold serves as a hedge against geopolitical risk. Gold Fields, which was the largest-weighted share in the ALSI during the first quarter of the year, has since fallen 41% from its peak in late January. As we have previously highlighted, the elevated weighting of precious metal shares in the ALSI is likely to introduce greater volatility and detract from the quality of the index’s underlying fundamentals. At the end of the second quarter, the Allan Gray Balanced Fund's exposure to precious metals through miners and commodity exchange-traded funds was 7%.
As we reduced our positions in precious metals and British American Tobacco over the past year, we used the opportunity to initiate or add to positions that, in our view, improve the quality of the Fund. These include companies we have been materially underweight for some time, such as luxury goods group Richemont and food retailer Shoprite. Given their strong business fundamentals, it may be hard to believe that both shares have underperformed the broader market until recently. Richemont is the world’s second-largest luxury goods company after LVMH, which we also hold in the Fund. Richemont owns some of the best jewellery brands in the world, including Cartier and Van Cleef & Arpels, with its less-profitable watch division contributing a declining share of group profits. Richemont has a very strong balance sheet with net cash before lease liabilities of approximately €8.5bn. We also like the fact that it’s difficult to see artificial intelligence (AI) disrupting the luxury goods market, and that the company may even benefit from wealth created by the technology. There has also been a shift in the company’s geographical revenue mix, away from Greater China to the United States.
The Fund has indirectly benefited from the rapid commercialisation of AI and the associated increase in spending. The stunning levels of capex announced by hyperscalers, such as Amazon and Alphabet, have led to a shortage of memory components used in AI data centre compute, particularly dynamic random-access memory (DRAM) and high bandwidth memory (HBM). This has resulted in a material increase in the earnings and share prices of businesses in the memory ecosystem, such as SK Square (through its stake in SK Hynix), Samsung Electronics and Micron Technology. Indeed, the three companies now each have a market capitalisation of over US$1tn. The market will be closely monitoring the sustainability of their earnings. Our long-held position in Taiwan Semiconductor Manufacturing Company, whose dominant position in the foundry industry that produces high-end chips has continued to deliver stellar results, does not appear expensive relative to some other areas of the market.