The Allan Gray Equity Fund has returned 22% year to date, ahead of its benchmark by 1%. On a long-term basis, the absolute level of real returns is above what we would expect the Fund to deliver through the cycle. Chief investment officer Duncan Artus explains.
The Equity Fund benefited from the strong relative performance of the offshore allocation. The global shares held in the portfolio continue to look very different from the World Index. The performance might surprise some clients, given that the Nasdaq and S&P 500 are recording new highs propelled by the mega-cap technology shares, which we are significantly underweight in favour of lesser-known names, such as Alnylam Pharmaceuticals or AI infrastructure company Nebius Group, both of which hold top 10 positions in the Orbis Global Equity Fund. We remain underweight US equities.
Locally, the FTSE/JSE All Share Index (ALSI) is also reaching new highs when measured both in rands and US dollars, breaching the 100 000 level for the first time. The index has been driven by Prosus/Naspers and the precious metal shares. In contrast, many SA Inc shares have been weak, and we are looking for opportunities among them.
Gold has regained its allure
We highlighted the strong performance of the gold sector in our Q2 2025 Quarterly Commentary. This has continued and then some! Gold Fields, AngloGold, DRDGOLD and Pan African Resources are all at all-time highs. Gold Fields and AngloGold are now jointly valued at R1.3 trillion and make up 13% of the index. While each of the stocks has its own idiosyncratic fundamentals, the significant price moves have been driven by the strong gold price. Although we have been positive on the gold price for a long period, we are very aware of the difficulty in predicting the gold price in the short and medium term. Long-standing clients would be aware that we have been attracted to the diversification that gold shares can bring to portfolios, but we are also cognisant that they have been poor businesses over the long term. We manage this tension by carefully thinking about position size and capping the Equity Fund’s exposure to the sector. We encourage readers who are interested in finding out more about our view of gold to listen to episode 28 of The Allan Gray Podcast. Unfortunately, given strong price performance, we were underweight the platinum sector, with our only exposure being Northam Platinum.
Next-generation products drive growth
One long-term holding in the Equity Fund which has found favour with investors is British American Tobacco (BAT). The British pound share price has risen by more than 40% over the last 12 months. Part of this was an attractive starting valuation, as we have highlighted on many occasions, but the rerating was also driven by improving fundamentals. We believe the business is in a better position today than it was two years ago. The market has increasingly focused on the growth of the modern oral business within its next-generation product portfolio. Modern oral is the nicotine pouch business, which is growing quickly, especially in the US. While BAT’s product, Velo, is a distant number two to Philip Morris’s Zyn product in the US market, it is rapidly gaining share. BAT is the global leader outside of the US. BAT is trading on a 9 times price-to-earnings (PE) multiple compared to Philip Morris at 24 times. While we have reduced the position given the price movement, there remains further rerating potential relative to Philip Morris should BAT continue to deliver in its next-generation product portfolio.