Rob Dower
Quarterly Commentary

2017 Q4 Comments from the Chief Operating Officer

Rightly, in the past year, there has been an increase in public pressure on fund managers like us to actively exercise clients' ownership responsibilities, holding the managers of companies to account for their ethics and their performance, rather than taking a short-term view and simply selling a share. Surprisingly, some of this pressure has come from passive managers, who are by definition long-term owners of the shares they hold, yet are seldom seen asking questions in shareholder meetings. This is an opportunity missed. Passive funds own every share in the index, and like their active counterparts, have a fiduciary interest in the success of these companies.

Whether an investment is actively or passively managed can be a distraction from whether it is well-managed. The best portfolio for most long-term investors is some kind of balanced fund, with a level of risk most appropriate for their needs and temperament. There is no generic index that provides this; someone has to decide what percentage to invest in equities, bonds, cash and property and how much to place offshore. For the equities, someone needs to pick the individual shares, or to decide which index to follow.

Someone decides the cap for individual investments (for example, including Naspers at its current index weight of more than 20% is a bold bet). For the offshore portion, which offshore investments are included makes a difference - there are many credible options, including index-based ones. Even if all of these choices are made mechanically ("passively"), they are real choices and they make a big difference to the outcome for an investor. "Passive" is often used as a marketing label to signal low fees. Astute investors will look past a label to rigorously compare costs between products, and consider them relative to long-term returns and to the quality of the service they receive.

The best portfolio for most long-term investors is some kind of balanced fund, with a level of risk most appropriate for their needs and temperament.

In any event, when it comes to individual stocks, the FTSE/JSE All Share Index (ALSI) is a poor starting point for a portfolio. It is better to consider each share investment on its own merits. The companies listed on the JSE have not been assembled to give investors in South Africa a good spread of the different global sectors, or even of South Africa's economy - they are a random group of large and small companies with a connection to South Africa. Worse, their weights in the index are a function of their size (a few big international companies dominate), their point in a business cycle, or short-term swings in their share price, not their long-term attractiveness to investors. As just one example, in mid-2008, Anglo American was more than 17% of the index. By early 2016 its share price had fallen by 90% from its peak. This is a sobering 9 times bigger percentage point loss to the index than Steinhoff's recent decline has caused.

Careful stock-picking is key

Rather than starting with an index, our philosophy is to invest your savings in shares that are trading for less than our estimate of their worth to a long-term investor. Sometimes this means we find value where others fear to tread. Positive sentiment drives prices up; we prefer to buy when things are on sale and we are convinced the price does not reflect the true value. During 2017, we upped our exposure to local equities, which surprised some investors at the time, given the mood of uncertainty. In his article, Duncan Artus discusses the rationale for our decisions, using the current positioning of our Balanced Fund to explain how our portfolios are positioned for multiple outcomes.

It is too early to tell, but there are signs that 2018 may be a turning point, the beginning of a new period of growth and prosperity for all South Africans. The challenge for the new ANC leadership is to give their full attention to fixing the economy - although this will require resolute and probably unpopular actions. Sandy McGregor offers some insights and suggestions in his piece.

Our stock market is concentrated with a lot of weight in a few shares, but it is also narrow, making up only 1% of the world's share investment universe. If you live here, it makes sense to diversify your savings and allow some of your money to earn returns elsewhere, not because the rest of the world is any less risky - the outcomes here are as unpredictable as they are in any other country, and our political stresses are not materially worse than those in Brazil, Turkey or Russia, for example - but because the bad things that could happen elsewhere are unlikely to be correlated with bad things happening here. In addition, investing outside South Africa gives you a much larger universe of shares to choose from.

Bearing this in mind, our offshore partner Orbis has had to do some very careful stock-picking to find compelling opportunities in an optimistic and overvalued world market - the FTSE World Index was up 24% in US$ in 2017. John Christy shares insights from the members of the Orbis investment team, who explain some of their choices.

Planning versus doing

Given the renewed sense of focus the start of the year brings, we often feel inspired to put plans in place for better diets, exercise and sometimes investing. Often weeks pass and we realise we are stuck; inertia kicks in at the very thought of planning itself. Don't worry if you get stuck at the planning stage - this is more common than you think. Wanita Isaacs explains how to overcome this and other common barriers and reminds us that plans count for naught if we don't take any action.

On the subject of taking action: In this quarter's Investing Tutorial, Carla Rossouw explains the benefits of taking advantage of the annual tax incentives the government has put in place to encourage us to save. A reminder that, if you want to, you need to take action before the end of February.

Developments at the Allan Gray Orbis Foundation

I am pleased to introduce Yogavelli Nambiar, who succeeds Anthony Farr as CEO of the Allan Gray Orbis Foundation. Anthony joined the Foundation a few months before it launched in 2005. Apart from his warm and inspiring leadership, he has been the main architect behind the Foundation's model for creating a pipeline of entrepreneurial talent in our country. This quarter's Foundation update illustrates his impact with some inspiring stories about the young entrepreneurs it has helped to develop. Anthony will be moving within the group to take responsibility for Allan & Gill Gray Philanthropies (Africa), a philanthropic arm of the Allan & Gill Gray Foundation.

Yogavelli is well-equipped to take over. She was most recently Founding Director of the Enterprise Development Academy at the Gordon Institute of Business Science (GIBS), the business school of the University of Pretoria, where she led the school's entrepreneurship efforts.

Prior to that she was Country Director of the Goldman Sachs 10,000 Women initiative, leading the design and delivery of this successful international women's entrepreneurship programme in South Africa.

Thank you for trusting us with your savings, and I wish you all the best for 2018.

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