Rob Dower
Quarterly Commentary

2016 Q2 Comments from the Chief Operating Officer

Trust and confidence are especially important for financial markets. Everything that changes hands in financial markets represents a promise of one kind or another – a promise to pay future profits, or a promise to make interest and capital payments, or a promise to accept a paper note in return for a ton of rice on some future date. If you took away the essential ingredients of trust and confidence, these promises would lose value and our basic systems for storing wealth for the future and ultimately for social development would collapse.

Everyone, no matter how rich or poor, has an interest in the world’s financial markets operating well and allocating capital to the best opportunities for human progress. Consider the internet, or electric cars, or countries borrowing to build infrastructure: all these depend on financial markets providing capital for many years before enough people are ready to pay for them directly.

Although we all have an interest in the markets, we know that humans will regularly sacrifice their interests if they feel unfairly treated. A well-known social experiment goes as follows: two participants are given a fixed amount of money to share, say R1 000. Only one has the right to propose a split, and the other can either accept or reject the proposal in a one-off game (i.e. there is no second chance). A rejection means that neither gets any of the money. Rationally, the proposer should hang on to as much as possible and the second participant should accept any proposal where they are offered more than zero. But of course, participants regularly turn down ‘unfair’ proposals to punish the proposer even though this is against their own self-interest. By far the most commonly proposed and accepted split in this game is 50/50.

Over the last 30 years the combination of global sourcing and advances in technology has reduced the value of middle income jobs in developed countries and median salaries in many rich countries like the US have stagnated. More recently, partly because of concerns regarding widespread economic risk, the most powerful central banks have maintained very low interest rates and printed money to lend to governments and banks. Their intention is that this cheap capital will drive investment and thus support economic growth. But economic growth continues to disappoint and the principal impact of their policies has been an increase in the value of financial assets, and thus in the wealth of the wealthiest people. The combined effect has been an increasing wealth gap between rich and poor, or really between the rich and the rest.

This increasing wealth gap and the lack of economic progress for middle classes in many countries has undermined popular trust in the establishment and in financial institutions. This is evident in the politics of the UK, America and Europe. The economic and political adjustments that will inevitably result are a source of significant uncertainty and risk.

Gold as a store of value in uncertain times

We are not alone in being more-than-usually concerned by the current risks in global politics and financial systems. In times of turmoil investors rush to safe-haven investments and recently gold has been a popular choice. As the leadership wrangles continue and existing governments seek to respond to social pressure by interfering in all aspects of economic activity, and central banks continue with their radical monetary experiments, gold is attracting renewed interest among a diverse group of investors. Sandy McGregor takes a comprehensive look at the history of gold supply and gold prices and the role that the precious metal has played over the years.

Simplicity helps build trust and confidence

Allan Gray’s reason for existence is to connect savers to the most attractive opportunities for investing their savings, be it in shares, bonds, property or in offshore investments. We aim to do an excellent job as a premium provider in our industry, but the majority of those we serve – in both total assets and numbers of individuals – are ordinary people. We proudly look after the savings of regular South Africans, including miners, municipal workers, people working in media, in engineering, some doctors, accountants and lawyers, some through company pension funds, some through policies bought at one of the large insurers, and some directly on our investment platforms. We try hard to make our products as simple and transparent as possible, and to provide high quality, intelligent service, in order to win our clients’ trust and confidence.

Our simple, transparent investment philosophy is an example of this. We buy shares and other assets that we believe are undervalued by the market and sell them when they reach our estimate of their true value. In light of all the uncertainty in the market, we thought that it was appropriate this quarter to use our Investing Tutorial to explain the basics of our approach to investing. Once you have a good idea of how our investment philosophy works you may be interested to learn that we share this exact approach to investing with our offshore partner Orbis. You can get a sense of how this approach is applied by reading the article on XPO Logistics by Ashley Lynn and Matt Adams, from Orbis. Note the big emphasis we place on holistic fundamental research: the same information determines the value of that company’s debt and its equity.

While the philosophy itself is simple, the research process is very thorough as we hunt for opportunities the market hasn’t recognised. Companies that are ripe for restructuring often offer good potential. Duncan Artus describes how we engage with the management and board representatives of these companies about making changes that can enhance long-term value, using Pick n Pay and Old Mutual as examples.

The tax man encourages you to save

The government has put incentives in place to encourage us to save more. While you can’t make investment decisions purely based on tax, it is an important factor to consider. The money you save by paying less tax can have a very positive impact on the returns you ultimately receive. Richard Carter and Jeanette Marais discuss the impact of tax on your investment returns in our different local products.

Allan Gray Orbis Foundation

Our country is one of the most unequal societies in the world. The Allan Gray Orbis Foundation is actively working to cultivate responsible, high-impact entrepreneurs as an economic and social lever for a more equitable and prosperous South Africa. In our final article Zimkhitha Peter from the Allan Gray Orbis Foundation describes how the Foundation aims to do this and she shares the stories of some successful fellows. These remarkable stories bring the Foundation’s vision to life.

Thank you for your ongoing trust and support.

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