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Local investing

The upside of down markets

2018 was not a good year for investors with price declines in many asset classes. The FTSE/JSE All Share Index (ALSI) fell 8.5% in 2018, or 21% when measured in US dollars, underperforming the MSCI World Index, which was down 8.7%. An annual single-digit price decline for the ALSI is not unusual and the 15% drawdown from the January 2018 peak is minor compared to the 40% drawdown in 2008 and the 32% drawdown in 2003. What concerns some investors is that the five-year annual return for the South African stock market is only 5.8% compared to the inflation rate of 5.4% over the same period. That said, the 10-year equity real returns are over 5%.

Over long periods of time, investing in real assets – equities and property as opposed to cash – has proven to be a superior method of protecting your savings. In many countries equities have outperformed inflation, but not overwhelmingly so. Consider the UK, where the FTSE 100 returned 4.2% over the past 20 years compared to inflation of 2%: this is 2.2% real before any costs or tax drag.  South African investors have been far more fortunate with the ALSI beating inflation by a quite incredible 10% over the same period. The UK is not unique – in many countries equity markets have only ground out marginal real returns. The real return for the MSCI World Index over the past two decades was 2.1%. 

How to be a successful investor in the current environment

For me there are a few takeaways from what many may consider the mediocre returns from global stock markets:


Across our funds, the local and global equities detracted from performance, while the fixed interest investments contributed.  Our best-performing domestic fund over the past one and five years is the Allan Gray Bond Fund. Unfortunately our offshore partner Orbis underperformed, which detracted from the performance of our asset allocation funds and meant the funds did not benefit from their offshore exposure – despite the rand weakening 16% against the dollar. It is not unusual for a contrarian manager, whose funds look very different to the benchmark, to periodically underperform. The Orbis Global Equity Fund has underperformed by more than 10% on nine occasions over the past 28 years, including two periods when it underperformed by more than 18%. On each occasion the underperformance was recovered and the Fund went on to outperform. Orbis has applied the same philosophy successfully since 1990, across multiple generations of stockpickers, and we see no reason that this time would be different.

The most significant detractors from our performance were British American Tobacco (BAT), Naspers, Reinet, Glencore and Investec. In all these cases, bar one, we do not think the underlying value has changed materially over the period. In every case we still own the companies and in certain cases we are increasing our holdings. In the case of BAT, the largest detractor by some margin, our assessment of the value has declined as the risks facing the company have increased materially. The US regulator is taking a more aggressive stance on nicotine use and the level of competition from e-cigarettes has increased sharply. That said the 46% fall in the share price is much greater than the decline in our estimate of fair value.


Many commentators are discussing the risks facing the global economy. For sure there are many risks. The most acute risk global investors are facing is probably the level of debt in the system, whether corporate or sovereign, while the most important global issue for South African investors is perhaps the Chinese investment bubble. As with many things, these risks are not new, it is just the emphasis investors choose to place on them.  Investors face their greatest risk when there are no risks apparent and assets are priced for perfection; conversely the time of least risk is when investors are extremely nervous about the future and assets are priced accordingly.

We are not in a world where assets are priced for extreme risk and are deeply undervalued, as was the case in the early 2000s and early 2009. However, in our view there appears to be decent value in South African stocks – and for sure better value than five years ago. We are consistent buyers of equity at these valuations, as demonstrated by the steadily increasing share exposure in our asset allocation funds. As we find more opportunities, we sell cash with its expected return of 7.5% and invest the proceeds in assets with greater return potential.  We think the companies we are investing in should generate returns well in excess of 10% over the next four years – an attractive proposition compared to an expected inflation rate of 6%.

The future is extremely uncertain and we strive to construct a portfolio that consists of undervalued assets, but also has the potential to outperform and protect your savings in many different scenarios.

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