Rob Dower
Quarterly Commentary

2016 Q1 Comments from the Chief Operating Officer

With political volatility at home, uncertain economic prospects in China and potential changes to the monetary policy momentum in the US, South African share prices have been particularly up and down recently. On top of this, the rand weakened 8% in the first few weeks of January before rebounding: many large companies had moves of over 100% between their low and high rand prices for the period and even more when measured in dollars.

We have used Graph 1 below in client presentations for as long as I have worked at Allan Gray to demonstrate headline differences – or a lack of difference – between sector valuations on the Johannesburg Stock Exchange. This is a sound long-term dataset but a very blunt measure of disparities in the market since they are shown only at sector level, and changes in value are often justified. Nevertheless, there are periods when no one or other sector is the darling or the dunce and other periods with big differences, and often this carries through to more – or less – efficiently priced individual shares as well.

Right now, you will notice that the financial sector as a whole looks cheap relative to its past, and the resources sector even more so. While fluctuation can be unnerving, it provides buying and selling opportunities for investors who have a view on companies’ underlying value (like us). If a company’s share price goes down and our research shows that this is not justified by changes to its fundamental prospects, we may be able to buy its shares at a bargain price. Thus, the big sector movements shown in the graph currently offer interesting ideas for research, and opportunities to buy some individual stocks and to sell others. Bear this in mind when you read this quarter’s investment articles, which cover two very different sectors: banks (included in the financials sector) and luxury goods (perhaps ironically, included in the industrials sector).

Indices relative performance

Volatility leads to opportunity

Mark Dunley-Owen examines whether or not there is opportunity in the banking sector. With Barclays exiting Africa, Old Mutual potentially offloading its stake in Nedbank and credit rating downgrades looming, the picture is not very rosy. While negativity can be self perpetuating, it doesn’t last indefinitely, and it is our job to find hidden future potential. Valuations of banks are at long-term lows and with their earnings looking sustainable, we are finding selective banking shares attractive.

Usually when we talk about time it is with reference to long term; this quarter it is with reference to timepieces, as Jacques Plaut looks at the history and mechanics of watches. He does this in the context of examining the highly cyclical luxury goods sector, with a focus on Richemont, which appears to be moving out of a period of very strong performance. As discussed earlier, fluctuation can work to our benefit: we have owned Richemont in the past and will keep an eye on it to see if it presents value in the future.

While picking shares that will do well is one aspect of successful investing, avoiding shares that drop significantly is another. William Gray, from our offshore partner Orbis, explains in his latest quarterly report why avoiding losers (in the form of overpriced shares) can sometimes be a better way to win than going for risky potential winners (cheap shares that may turn out to be justifiably cheap).

Responsible investing

These examples describe the most common view of active portfolio management – actively constructing a portfolio of shares and other investments that aims to beat its benchmark and to make money for clients. However, we do not believe that our responsibility ends there. There is another aspect of active management that is often overlooked: shareholder activism. We take our role as custodian of your hard-earned capital very seriously. This includes engaging with company management and voting during shareholder meetings to protect your ownership interests. Grant Pitt and Pieter Koornhof explain.

You entrust us with your hard-earned savings, and we do our best to make your capital grow and contribute towards your future needs. Most of us know we should be saving more, but sacrificing today’s wants for tomorrow’s needs is very challenging. We are often asked how much of one’s income is prudent to save for retirement. Of course this answer varies depending on your personal needs and lifestyle goals, but Wanita Isaacs provides a framework for you to think more strategically about this future event.

No matter your age or life stage, it is important to be aware of what happens to your investments when you die. And as uncomfortable as it is to confront your own mortality, it is important to create a plan that provides for the financial needs of your loved ones. To assist with the complexities, in this quarter’s investing tutorial Thandi Ngwane offers a summary of the rules around estate planning for various kinds of investments.

Changes to the board

You may have read in the papers that the shareholders of Allan Gray’s main operating company in South Africa and our group holding company recently approved the appointment of Mr Nhanhla Nene to both of these companies’ boards, and that he has accepted these appointments. We are very happy to have someone of Mr Nene’s experience on our board, and we are grateful that he chose to accept the appointment. At its best, our leadership culture is purposeful, humble and accountable, and we are proudly independent-minded. Mr Nene fits the bill on all of these and we are looking forward to his contributions to governance and strategy on our board.

Thank you for trusting us with your savings.

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