Rob Formby
Quarterly Commentary

2019 Q3 Comments from the Chief Operating Officer

I recently attended a presentation by trend analyst Dion Chang. He spoke passionately about the way the world is transforming as industries digitise and competition from unexpected sources comes knocking on the door of entrenched household names. Add to this the changing needs and demands of Generation Z (born between 1995 and 2010), who seem more focused on sharing everything from vehicles to workspaces, as opposed to selfies and a minute-by-minute account of their day like their millennial counterparts.

If, like me, you have Gen Z kids, you may be grappling with how best you can equip and educate these digital natives to face a future that is set to be the embodiment of the science fiction movies we grew up thinking were far-fetched. A daunting task. 

Of course, while we often fight it, change is positive and should be expected. Technology has increased the rate of change, but if you look back through the generations, you’ll no doubt find many worried parents pondering their children’s redundancy in the workforce due to one invention or another.

avoiding risk entirely may present you with an unforeseen outcome of missing opportunities

Investing where the future is unknowable

Our parents and their parents’ parents and the parents who came before them had to prepare their offspring for a changing world. What exactly the changes would mean, and their knock-on impact, has always been unclear. They had to encourage and guide and make decisions with imperfect information. Likewise, this is the case with investing, where information is not perfect and outcomes are uncertain. 

Andrew Lapping touches on this theme in his article. He notes that the future is unknowable, and that for this reason, we have to build portfolios that can weather a host of different storms. This is something we think about all the time, and the golden thread that laces through all this quarter’s investment articles.

In his lens into the portfolio holdings, Leonard Krüger discusses the investment case behind five of our top equity holdings. Although many of these shares have underperformed of late, Leonard is optimistic: Each of these shares trades at a cheap valuation today and materially below our assessment of its true long-term intrinsic value.

Our offshore partner, Orbis, is similarly excited about their holdings. Brett Moshal and Michael Heap defend the case for their choices in their article. Although Orbis is going through a period of painful underperformance, they maintain that what makes it bearable is that the shares they like and own have become cheaper, offering buying opportunities.

In a world where the future is unknowable, sound economic policy strives to create a greater degree of consistency. In his article, Sandy McGregor offers some comments on the Economic Policy Paper that was recently published by the minister of finance.

It’s not always easy being contrarian

While periods of underperformance are an expected and necessary part of contrarian investing, they are not pleasant for our clients and can be extremely stressful. We recognise that at this point in the cycle, where both us and Orbis are underperforming, staying the course can be very difficult. We thank you for your trust and commitment to your long-term goals.

We often speak about contrarian investing, but it’s not always clear exactly what it means. Radhesen Naidoo provides an explanation in the Investing Tutorial. In essence, being contrarian means you have to be comfortable swimming against the tide, owning the unpopular companies which are underperforming, and not owning the popular ones when they are doing well. To get the benefit of the approach, you have to remain committed during some very uncomfortable moments.

Uncomfortable moments, typically felt during uncertain times, may make you feel like you are taking on too much risk. As an individual, it is important that you have a clear understanding of your own risk appetite as this will influence your investment decisions. But it is also important to be aware that avoiding risk entirely may present you with an unforeseen outcome of missing opportunities, and therefore not achieving your investment goals. Nadia van der Merwe weighs up the risks and opportunities presented by the current environment and delves into how we define risk at Allan Gray.

Conversations to have with your loved ones

Talking to family members about death and making plans for this eventuality are not things any of us feel easily comfortable with. However, it is infinitely easier to have an open conversation outside of the stress of these tragic situations, and to deal with many of the requirements upfront, than leaving it to a family who is grieving. The process behind death claims is different for various investment products, and particularly complex for retirement funds. Sonja Smit candidly touches on some of the important aspects you should consider.

no matter what the journey lands up looking like, saving gives you options

Of course, it’s important to speak to your loved ones about your investments, but it’s also important to encourage them to start thinking about their own investments from early on. While, as Dion Chang notes, life may not be the linear birth-school-work-retirement-death journey textbooks suggest, no matter what the journey lands up looking like, saving gives you options.

Thank you for your continued support.

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