‘Active management is going to make a big impact’

Allan Gray’s Duncan Artus shares his stock-picks and risks to watch out for.
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Allan Gray CIO Duncan Artus sees investing as “a probability business”. And in a world where significant shifts in the world economy are creating huge dispersions, fund managers need to be adaptable.

“At Allan Gray, we are bottom-up investors, but we still want to be on the right side of long-term trends,” Artus said during the Allan Gray Investment Summit last week. “We want to be on the right side of the extremes of valuation and economic variables.”

These include the risk that inflation will be sustainably higher in the coming years than it has been in the recent past.

“This increased inflation, particularly in the developed world will show through in higher dollar commodity prices,” Artus said. “This will be exacerbated by ESG (environmental, social, governance) policies raising the cost of capital for resources companies.”

Growing inequality
If inflation spikes, it also raises the risk of greater social instability around the world, and what governments might do in response. This is in the context of a world already grappling with high levels of inequality exacerbated by the response to the global financial crisis.

“We have growing inequality where people who own assets are getting wealthier and those that don’t are getting poorer because of QE [quantitative easing] policies,” Artus said. “In the future, I think there is going to be far more focus on policies favouring redistribution and laws that favour labour over capital.

“In South Africa, we already have a very distributive economy. If this shift happens in the developed world, that might give the government here the cover to introduce even further measures like a basic income grant.”

Governance and politics
The impacts of ESG will also be felt much more broadly in Artus’s view.

“When people they think about ESG, they focus a lot on the ‘e’ – the environment. But I think the ‘s’ and ‘g’ are going to become a lot more significant. Governance is not going to be just looking at the boards of companies, but more focused on politics.

“The world is going to become more polarised,” Artus added. “You are going to become part of the west, or you are going to align with China. This is important for South African equity investors because we have massive direct exposure to China.”

This includes the clear link through Naspers/Prosus, the fact that Richemont’s growth is very linked to Chinese wealth, and that local commodity producers rely heavily on Chinese demand.

Being active
Given these dynamics, Artus sees fund managers being under pressure to protect and grow their clients’ wealth.

“I think active management is going to make a big impact,” he said. “I think, in the scenario I have sketched, you can’t be running a benchmark-cognisant portfolio and look like everyone else.”

It is an environment, in his view, requiring careful stock selection.

“How do we gain exposure to this change in leadership, whether it’s the unintended consequences of QE or ESG, the energy transition, inflation, or what’s happening in China?

“Over the next decade, I would be underweight the technology and disrupter stocks that have been so strong over the past 10 years.”

If you think of Facebook or Amazon, these companies didn’t even exist when the IT bubble burst. We don’t know who the winners are going to be in the next 20 years.

“We also want to be long the suppliers and producers of metals that will be used in the energy transition. We also need exposure to precious metals.”

This has been the best way to protect against inflation.

Finding opportunities
“If you are a bottom-up manager, you also look for specific things like the move to omnichannel retailing,” Artus added.

Here he believes there may be an under-appreciated opportunity in Woolworths as online sales improve and Country Road is showing the potential to be a valuable omnichannel retailer.

“If you’re worried about redistributive policies in South Africa, you could own Pepkor,” Artus added. “If social grants increase, that finds its way into the top line of Pepkor.”

The risk he worries about the most, however, is China. When the government can change the rules of the game without notice, investors have to be cautious.

“The events of the last month-and-a-half have brought that to the fore,” Artus said. “Everyone is going to have to think a lot harder about the absolute size of Naspers/Prosus in their portfolios.

“But you also don’t have to own the big stocks so heavily exposed to China. What about BAT? It’s cheap, it has a strong dividend yield in pounds, and zero China exposure. That’s because its assets were nationalised by the Chinese government in the 70s.”

Duncan Artus is co-manager on the Allan Gray Balanced fundAllan Gray Stable fund and Allan Gray Equity fund.

Patrick Cairns is South Africa Editor at Citywire, which provides insights and information for professional investors globally.
This article was first published on Citywire South Africa here, and republished with permission.


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Passive management makes a huge positive impact on my portfolio.

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