The Allan Gray Equity Fund has delivered strong relative performance this year despite a weak local equity market. Rory Kutisker-Jacobson explains where the Fund is finding value, highlighting where our positioning differs from the market.
Our portfolios continue to be built from the bottom up, with valuation and a margin of safety driving decisions rather than compelling market narratives. This patient approach tends to be rewarded when market returns are muted or negative, and we are pleased to see that pattern persist in the current environment.
While the overall year-to-date performance of the local equity market has been weak, the performance of individual shares has diverged significantly.
Within commodity-related equities, broadly speaking, one did not want to own precious metal miners and wanted to own almost everything else. Following weaker precious metal prices, the share prices of most major gold and platinum group metal (PGM) miners are down year to date, many by double digits, with the exception of AngloGold, which is up 7%. In contrast, on the back of a strong copper price, Anglo American, BHP and Glencore are all up around 30% year to date. At the top end of the market, fuelled by significantly higher oil prices, Sasol is up over 100%. The Allan Gray Equity Fund has benefited from being underweight precious metal miners, although it does hold AngloGold and is overweight Glencore, Sasol and BHP. More recently, we have trimmed some of these positions into strength, although we continue to hold large positions in several diversified miners.
At the other end of the spectrum, two of the worst-performing shares year to date are Naspers and Prosus. They are effectively the same company, with Chinese technology group Tencent as their primary asset. Despite reporting strong full-year earnings, the share prices of Naspers and Prosus are both down over 30%, as investors have become sceptical of Tencent’s artificial intelligence (AI) spending and the long-term risks AI poses to its business model. We have been adding to Naspers and Prosus as the shares have continued to derate, while managing the overall position size for idiosyncratic risk.
South African consumers continue to feel the pinch
Locally, an economy under strain has kept pressure on consumers and, by extension, the retailers most exposed to them. That pressure is visible in how South Africans are shopping, not only in how much they are spending. Grocery volumes have held up reasonably well, but the composition of spending has shifted sharply towards value. Retailers such as Shoprite and Boxer have been the clear winners, while Pick n Pay's core business and Spar have lost ground, squeezed by both market pressures and internal execution challenges. Independent and informal retailers, such as spaza shops, traders and independent wholesalers, have also continued to take market share, having benefited from questionable cost structures and from not facing the same regulatory and compliance burden as listed retailers. The relative performance of the winners versus the losers is reflected in their share prices: Shoprite and Boxer are both up over 10% year to date, while Pick n Pay is down more than 20% and Spar more than 50%.
None of the listed clothing retailers have seen their share prices rise this year, although the spread between them remains extreme. The “best” performer has been Mr Price, down 7% year to date, while Foschini has fallen a staggering 43%. Pepkor and Truworths sit somewhere in between.
Pharmacy retailers are also down, but arguably for a different reason. Former market darling Clicks is down 38% year to date and close to 50% from its peak in December 2024. The company has yet to report results to the end of August 2026, but based on its half-year results to February 2026, turnover was still growing and headline earnings per share had risen by 8.1%. Yet the share fell more than 8% on the day the company announced its results, with the market unimpressed by full-year earnings guidance. There are some growing concerns around renewed competition from Dis-Chem and Shoprite, and some market missteps, but, in our view, this is less a story of a broken business than of a business being derated from an unusually rich multiple. Clicks traded at more than 30 times earnings for a long period, a rating that only holds up if growth stays exceptional. Now trading at closer to 15 times earnings with a return on equity still comfortably above 30%, the stock screens far more interesting to us than it did 12 months ago. We would rather own a good retailer after the market has taken the froth out of the price than pay up for the same business when everyone agrees it is wonderful.
Recently, we have been buying Clicks and several other retailers, as the market has priced them as if the current squeeze on consumers is permanent rather than cyclical. With the benefit of hindsight, we bought some of these shares, notably Spar, too soon, which has detracted from performance.
Has the novelty of AI worn off?
Offshore, the market's infatuation with all things AI has begun to meet some resistance, with heightened volatility in the AI-related names this year. Investors are beginning to reassess the pace and safety of AI development and, more pointedly, whether the enormous capital being committed to data centres will earn an adequate return. We continue to believe that the sensible way to gain exposure to this theme is rarely through the most obvious or richly rated vehicle. The Fund’s AI-related offshore exposure tends to sit with profitable second-order beneficiaries, such as semiconductor manufacturers, that are priced more conservatively, rather than the companies generating the most excitement.
One final point is worth stressing. Much of this commentary refers to the Fund being overweight or underweight. This is meant to highlight where we differ from the market, not to describe how we construct the portfolio, which is built from the bottom up and remains benchmark-agnostic. Precious metal miners provide an apt example. At quarter-end, gold and PGM shares made up 11% of the Fund’s local equity exposure. We think these counters are attractive and deserve a place in the portfolio, but we cap our overall exposure, as performance would otherwise be driven disproportionately by movements in gold and PGM prices – factors outside management’s control. In contrast, precious metal miners accounted for 24% of the FTSE/JSE All Share Index at quarter-end. The index will do very well if gold and PGM prices rally, but this leaves passive investors disproportionately exposed to single-factor risk.
The market remains volatile and, in many instances, the gap between our estimate of intrinsic value and market prices continues to widen. Experience suggests that this gap eventually closes, but rarely on a timetable convenient to anyone. Our task is simply to continue buying quality businesses at a discount to what we believe they are worth and to let time do the rest.