Rob Dower
Quarterly Commentary

2015 Q4 Comments from the Chief Operating Officer

As set out in his letter to clients, our founder, Allan WB Gray, and his family have transferred their controlling interests in Allan Gray and Orbis to the newly established Allan & Gill Gray Foundation. The Foundation has no owners in the traditional sense and is instead designed to exist in perpetuity and to serve two equally important purposes: to promote the commercial success, continuity and independence of Allan Gray and Orbis and to ensure that the distributable profits the Foundation receives from these firms are ultimately devoted exclusively to philanthropy.

Value-oriented, contrarian investment firms do better with committed shareholders

We are keen participants on your behalf in the public share markets, using their convenient rules and systems to invest in companies where we think we can generate a return for our clients. If there were no public markets for companies’ shares our jobs would be much harder. We believe that public ownership is a good model for other businesses, so why do we attach so much value to our own private and independent ownership?

When you buy a bar of soap or a toaster or even a night in a hotel, you benefit (or not!) from your decision immediately and can react to it, either by buying more or by taking your business elsewhere. If you are a shareholder, or a potential shareholder, of a soap or hotel company you can see quite quickly how well the managers of those businesses are doing for their customers by trying out the product, looking at sales volumes, or analysing their latest financial results. 

In our business this isn’t always the case. Because of our investment philosophy, there can be long periods when we temporarily underperform in spite of making good long-term investment decisions. At times like these, it is critical that our shareholders understand and support our investment philosophy, while holding us accountable over the long term. A shareholder with low conviction in our philosophy observing underperformance and client outflows could be tempted to force a switch in that philosophy at exactly the wrong time. This would be a disaster for client returns and for our business.

Our shareholders hold management accountable for those things that drive long-term success: the quality of investment decisions, the long-term returns achieved for clients, the quality, accuracy and efficiency of our client service, our effectiveness in using technology to serve clients better and our ability to attract good people and grow and motivate them. All of these things add up to doing a good job for clients, which is visible in long-term investment returns and in client loyalty over time.

The new Foundation entrusts control of the firm to Orbis Allan Gray Limited, a holding company whose board consists of a majority of executives of Allan Gray and Orbis. The board also includes non-executive directors with power over critical issues of governance, for example remuneration. With perpetual ownership in strong hands, we can focus entirely on adding value for clients for generations to come.

I am sure some of you will have questions about the Foundation. Please refer to the frequently asked questions, where Tamryn Lamb provides further detail, and you can also read the Foundation’s charter on our website.

The news about the Gray family’s donation was an optimistic exception in an otherwise very strained few weeks for race relations and politics in South Africa. Hopefully our founder’s generosity will inspire more of us to help those less fortunate with their progress, or to reach out between communities, or to make a difference in some other way. Our country has many difficult problems to solve and they won’t solve themselves.

The new Allan & Gill Gray Foundation should not be confused with the 10-year old Allan Gray Orbis Foundation , which is making fantastic progress, as described by Zimkhita Peter in her update. We will continue to fund the education of hundreds of high potential scholars and students through our donations to the Allan Gray Orbis Foundation, and our empowerment partner E2 stands ready to finance the entrepreneurial ventures of graduating Allan Gray fellows.

You play an important role in your own investment success

We are excited by the potential for the new Foundation to contribute to the common good at home and globally, but we are very mindful that what matters most to you and to our success is long-term investment returns.

The past year was a tough one for investors; between the falling oil price, the crumbling rand and political upheaval, the markets have been quite up-and-down. Our portfolios were not immune, but our flagship Allan Gray Balanced, Stable and Equity Funds ended 2015 well ahead of their respective benchmarks and of inflation and all are also now ahead of their benchmarks over one, three, five and ten year periods. Allan Gray investors are better at long-term investing than the average in our industry: thank you for staying the course. As you know, performance does not come in a straight line. Graeme Forster and John Christy explain this in more detail in the Orbis contribution.

It is helpful to think about choosing an investment manager as a long-term partner but some investors look to add extra value by switching. If you are tempted to try to switch out of unit trusts at a high and in at a low, bear in mind that the timing is very hard to get right. Rather than reacting to short-term performance, it is generally better to make changes to your investment in an unemotional and methodical fashion, in response to changes in your life stage and investment goals, or after a careful review. Wanita Isaacs offers some useful tips on how to approach your review in this quarter’s Investing Tutorial.

Tax-free investing

I am pleased to announce that we are launching the Allan Gray Tax-Free Balanced Fund and it will be available in our new Tax-Free Investment Account, a savings product suitable if you are investing up to R2 500 a month and are saving for the long term. This Fund will be managed in broadly the same way as the Allan Gray Balanced Fund, but it has a fixed fee, to comply with legislation that stipulates that investors can only invest in fixed fees in tax-free savings and investment accounts.

Earl Van Zyl and Richard Carter look at the product features. You can learn more about our tax-free investment account and invest via our website. Note that if you are keen to benefit from tax savings in this account this year, you need to complete the investment process before 26 February.

I wish you all the best for the year ahead.

The financial services, products or investments referred to on this website are not available to persons resident in jurisdictions where their availability or distribution would contravene local laws or regulations and the information on this website is not intended for use by these persons. This website is for information only and does not in any way constitute a solicitation or offer by Allan Gray Proprietary Limited or any of its associates or subsidiaries (collectively “Allan Gray”) to buy or sell any financial instruments or to provide any investment advice or service.

By selecting one of the countries below I confirm that I have read and understood the above and that:

(a) I am not a South African citizen; or 
(b) I do not reside in the Republic of South Africa; or 
(c) I am not otherwise a person to whom the communication of the information contained in this website is prohibited by the laws of my home jurisdiction; and 
(d) I am not acting for the benefit of any such persons mentioned in (a),(b) and (c) and 
(e) I confirm that any investment with Allan Gray is based on my own initiative and not due to any offer or solicitation by Allan Gray.

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