Rob Formby
Quarterly Commentary

2018 Q4 Comments from the Chief Operating Officer

2018 was a difficult year for local investors, with the FTSE/JSE All Share Index (ALSI) delivering -8.5%.This result caught many investors off guard as 2017 had delivered good returns, with the ALSI returning 21%.Few asset classes were spared: Only South African bonds and cash offered positive returns, at 7.7% and 7.2% respectively.

South Africa was not alone in poor performance; global markets were also under pressure. As a result, our offshore partner, Orbis, had a difficult year too, with their funds returning -16.9%. However, as Orbis President William Gray reminds us in his article, while the current market conditions may make our approach difficult to stomach, it will be more rewarding for those left standing. The Orbis Global Equity Strategy has underperformed by more than 10% on nine occasions over the past 28 years, but on each occasion, it recovered and went on to outperform. 

Finding opportunity in volatility

While it was no doubt stressful as the value of your investment went down, the poor market conditions of the past year present the opportunity for value investors like ourselves and Orbis to generate good long-term returns. Our investment approach is to buy quality shares when we think they are undervalued by the market and sell them when they have reached our estimate of fair value. Therefore, when market sentiment turns negative, and shares fall below what we believe they are worth, we can snap them up at bargain prices.

it is important to remember that periods of poor performance have historically been followed by good performance over the long term

A quote from Warren Buffett, who is considered by many as the godfather of value investing, sums up our approach perfectly: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” While many investors would have preferred that we run for safety to asset classes that have done better, our portfolio managers have in fact been selling our funds’ cash holdings to take advantage of the current discounts the market is offering.

Our portfolio managers are also beginning to find opportunities in the property sector. For the past 13 years, our funds have had low exposure to listed property, however, recent performance suggests that it’s time to change gears.

Mark Dunley-Owen explains our investment approach and discusses the companies we are enthusiastic about in the property sector.

While research has found the link between economic growth and stock market returns to be tenuous at best, it is still a good idea to understand the macroeconomic conditions that the local companies you are invested in operate within. Sandy McGregor discusses the challenges facing our economy and what needs to be done if we are to get back on the right fiscal path. His article makes for a sober read, but there is a sense that 2019 may be a turning point with the right leadership in place determined to kick-start economic growth.

Regardless of how South Africa Inc. is performing, offshore diversification is an important part of your investment strategy. South Africa makes up less than  1% of the global investing universe, and without offshore diversification you could miss out on some great long-term opportunities. You get some offshore exposure through your local unit trusts that are mandated to invest offshore – the Allan Gray Equity, Balanced and Stable Funds are currently making use of the full 30% offshore limit – however, if you feel you need additional exposure, you can use your personal allowance of up to R11 million per calendar year to invest offshore. You can do this by going to offshore investment managers directly, or you can make use of the convenience of an offshore platform. Julie Campbell explains the changes we have implemented on the Allan Gray Offshore Platform to make this option more accessible for you.

when market sentiment turns negative, and shares fall below what we believe they are worth, we can snap them up at bargain prices

Your role in your investment success

It can be very difficult to remain invested while your gut instinct tells you to run, but the trick to making money from value investing is to give us enough time for our investment style to show results. It is important to control your emotions and avoid unnecessary changes at exactly the wrong time. In the Investing Tutorial, Mthobisi Mthimkhulu explains why it is important to resist the temptation to switch funds during poor performance in search of better short-term returns: While doing so may seem like a good idea, switching can destroy the value of your investment over the long term.

The good news

Never without a good story to tell, Yogavelli Nambiar from the Allan Gray Orbis Foundation reflects on the progress they have made over the past year in their efforts to develop an entrepreneurial mindset among our brightest young minds. 

2018 was certainly bumpy, but it is important to remember that periods of poor performance have historically been followed by good performance over the long term. Thank you for continuing to trust us with your savings, and I wish you the best for 2019.

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