A volatile first half of 2026 highlighted the importance of diversification and disciplined portfolio construction. Tim Acker discusses how the Allan Gray Equity Fund has navigated a narrow local market led by resource shares and reflects on opportunities offshore, where the Fund gains exposure to AI-related growth through attractively valued businesses beyond the direct AI winners.
Throughout the Allan Gray Equity Fund's history, outperformance has tended to be stronger in falling markets than in rising markets. The recent performance has been in line with this pattern, particularly in the domestic portion of the Fund. 2025 was a more challenging period for the Fund: Absolute returns were good at 26.7% but lagged the benchmark’s 28.2% return. The first half of 2026 has proven more challenging for markets overall. However, the Fund has meaningfully outperformed in this environment. The period also included significant volatility linked to the escalation of the US-Israeli conflict with Iran, reminding investors of the unpredictability of geopolitical events. This reinforces the importance of maintaining a diversified portfolio. We aim to position the Fund such that it can perform reasonably well across a range of macroeconomic environments rather than relying on a single outcome.
The strength of the local equity market through 2025 and early 2026 was narrow and driven largely by resource shares, particularly a small group of precious metal producers. A key feature of the Fund’s positioning has been an underweight to this segment. While we maintained a meaningful absolute allocation to gold, it remained well below the index weight, which we viewed as excessively large. Although we recognise gold’s role as a portfolio hedge, we have limited exposure given concerns about single-commodity dependence and the sector’s long history of value destruction. These risks became more evident during the period, with the gold price correcting after a strong run and company-specific issues emerging, such as Gold Fields’ licence dispute in Ghana. Speculative activity in platinum group metals (PGMs) was pronounced in late 2025 and early 2026, with prices rising sharply. We used this strength to reduce exposure, maintaining only a small position. Since then, many PGM shares have corrected significantly, with some falling by more than half from their first-quarter peaks.
A second key theme has been the Fund’s continued rotation into SA Inc. shares. Many domestically focused companies have lagged the broader market and still trade at depressed valuations despite the FTSE/JSE All Share Index reaching record highs earlier this year. We took profits in areas of strength, such as precious metals and multinationals like British American Tobacco, and redeployed capital into select domestic businesses where valuations are more compelling. These include retailers such as Shoprite, Mr Price and Dis-Chem, which we view as high-quality businesses trading at meaningful discounts to their history. While the local macroeconomic backdrop remains extremely challenging, we continue to approach these opportunities with selectivity and caution.
Global equity markets have remained resilient, largely supported by ongoing enthusiasm around artificial intelligence (AI). Returns have been concentrated in a relatively small group of companies with elevated valuations. While some of these businesses are underpinned by structural growth, we believe that global markets, particularly in the United States, are pricing in optimistic assumptions, which warrants a cautious approach. The Fund’s offshore holdings, which are predominantly managed by Orbis, have outperformed the strong market, despite limited exposure to well-known AI leaders. Instead, the Fund owns some second-order beneficiaries, such as semiconductor and memory manufacturers, including Taiwan Semiconductor Manufacturing Company and Samsung Electronics. The companies offer exposure to similar themes at more reasonable valuations. More broadly, the Fund’s offshore holdings remain underweight the US market and tilted towards regions where prospective returns appear more attractive. We encourage investors to refer to Orbis’ Q2 2026 factsheets for further insight.