This article was originally published as commentary in the Stable Fund factsheet.
‘May you live in interesting times’ is an English expression which many believe to be a translation of a traditional Chinese curse. The expression seems to have actually originated from a British statesman, Joseph Chamberlain, who in 1898 said: ‘I think that you will all agree that we are living in most interesting times. I never remember myself a time in which our history was so full, in which day-by-day brought us new objects of interest, and, let me say also, new objects for anxiety.’
In this expression, ‘interesting’ is commonly equated with ‘difficult'. Investing is similar, in that the more interesting things are, the more difficult they are to understand and forecast accurately.
An interesting five years
The last five years have certainly been interesting times for investors. Central banks have repeatedly stimulated the global economy yet inflation and interest rates continue to fall. The person in the street has increasingly voiced dissatisfaction with the status quo. Technology has challenged long held assumptions. Locally, confidence in South Africa is near all-time lows as we move between political and economic crises.
Despite the interesting times, the Allan Gray Stable Fund (the Fund) has outperformed inflation by 37% cumulatively over the last five years. Allan Gray’s objective is to create long-term wealth for our clients, and it is pleasing that clients invested in the Fund are wealthier in real terms today than they were five years ago. While we cannot predict the future, we will continue to manage the Fund with this objective in mind.
There are two investment lessons from Chamberlain’s expression. Firstly, common wisdom is often wrong. Our philosophy requires us to question assumptions and have conviction in our views even when they are different from the consensus. The Fund has thus held large investments in British American Tobacco (BAT) and SABMiller (SAB) despite these being criticised as expensive and lacking growth. Our view is that well-managed, cash-generative businesses such as BAT and SAB were undervalued relative to an expensive market. This proved correct, with both shares outperforming the FTSE/JSE All Share Index (ALSI) by more than 125% cumulatively over the last five years. In light of this outperformance we have gradually reduced the Fund’s BAT and SAB exposure and invested the proceeds into shares that we believe now offer better value.
Secondly, Chamberlain suggests that we have been living in interesting times for a long time. The uncertainties of today are not new and, while they make investing more difficult, they also create the opportunities needed for the Fund to generate long-term wealth.
Old Mutual, for example, is a collection of insurance and investment businesses across three continents that Chamberlain may have described as ‘interesting’. It has significant exposure to the United Kingdom (UK), the outlook of which is more uncertain since the UK voted to leave the European Union. Perhaps because of these difficulties, one can buy Old Mutual at an attractive discount to what we believe is the value of its individual businesses. Old Mutual thus remains one of the Fund’s larger equity holdings.
The Fund’s asset allocation remained similar over the quarter except for marginally higher foreign net equity exposure. The most notable change in local equity exposure was the reduction in BAT and SAB mentioned above. Fixed interest maturities were invested into short-duration bank instruments that offer attractive real yields at low risk.