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Filling big shoes in an expensive market

There are no easy wins as Ian Liddle takes reins from late Simon Marais at Allan Gray.

HANNA BARRY: Well for this week’s market commentator podcast we’re chatting to Ian Liddle, the newly appointed Chairman of Allan Gray, following the February passing of Simon Marais. Liddle is of course also Chief Investment Officer of Allan Gray.

Ian thanks for your time today, you certainly are stepping into some very large shoes. As Chairman, what do you believe will be your number one challenge in the long term?

IAN LIDDLE: Yes, it’s obviously very sad to be taking the place of Simon under these circumstances and he really set very high standards for all of us at Allan Gray, and I think really the challenge is to uphold those high standards and continue performing to the high standards that Simon set and before him Allan set for us as a firm to really add value for our clients.

HANNA BARRY: In terms of where markets are now, what does Allan Gray view as perhaps its number one challenge to add value to clients or what is it watching most closely?

IAN LIDDLE: Well, it’s hard at the moment because the markets don’t seem to be offering lots of opportunities. Certainly, we’ve got nothing like we had in 1998 where the markets offered fantastic opportunities for high returns at what we considered to be low risk. If anything, it’s the reverse now, so we can see lots of scenarios where one could lose money and lots of risks, and not much upside. So it’s a very challenging environment to invest in now and the approach that we’re taking is to try and manage risks carefully in all our client’s portfolios depending on the mandate they’ve given us and the flexibility we have to do that.

HANNA BARRY: Would you say that Allan Gray is taking quite a defensive position then?

IAN LIDDLE: Ja, so maybe a better way to describe it is if we are finding opportunities to sacrifice perhaps a bit of potential upside but protect the downside then we’re looking at opportunities like that and that applies to equity selection and thinking about equities and it also applies to asset allocation and a balanced portfolio where we have fairly high levels of cash and some hedging at the moment.

HANNA BARRY: What stocks on the equity front, what stocks does Allan Gray like at the moment in terms of fulfilling that mandate?

IAN LIDDLE: Well maybe one example is Old Mutual. Old Mutual is one of the shares in our Top 10 holdings and you might recall – I think some of our clients are a bit surprised when they see Old Mutual in the Top 10 because they’re used to seeing Sanlam in the Top 10. Sanlam was a great investment for us and Johan van Zyl did a fantastic job at Sanlam, but the market’s valuation of the company has moved from a discount to what the actuaries estimate its value at, what they call embedded value, to a large premium to embedded value, whereas we can buy Old Mutual today at prices close to its embedded value. So the downside risk is much less we think in Old Mutual when we’re not paying such a big premium to embedded value. So that would be one example.

HANNA BARRY: It has been difficult of course for value investors like yourselves to find those stocks that are either discounted or even trading at a fair value, in large part because of inflated asset prices that we are seeing off the back of quantitative easing for one. Is there still opportunity, you mentioned Old Mutual, but is there still opportunity as a value investor to find those discounted shares?

IAN LIDDLE: Yes, there’s always opportunity and we’ve got a full investment team of 20 analysts working hard to find those opportunities and they come up from time to time, but the trick is to be prepared to take advantage of those opportunities. So maybe an example would be the recent listing of Zambezi Platinum, which is the black empowerment vehicle for Northam Platinum. We think that preference shares in Zambezi are very attractively valued and we were able to pick up the right to subscribe to a large number of the Zambezi prefs when they were trading as the Northam MPLs over the last couple of weeks. But you had to be prepared, you had to have done your work in advance and then trade aggressively to take advantage of the opportunity.

HANNA BARRY: In your most recent quarterly commentary you mention that investing directly in platinum or palladium is viewed as lower risk than investing or buying shares rather in the mining companies that produce the metals. Can you just talk us through your thinking there?

IAN LIDDLE: Yeah, I guess you will probably hear this from most people but when valuing the platinum mining companies today it looks to us like the platinum prices need to be roughly 20% higher than they currently are to justify the prices that the market is paying for the shares in the companies. There’re all sorts of risks which come with investing in the South African mining sector which are well known and we think that, the first 20% upside just in the metal prices is something which is attractive to us with much less risk. So hence our preference for the metals.

HANNA BARRY: Let’s talk about niche asset managers, we have seen a number of them come on stream in recent years and I suppose making the likes of Allan Gray and Coronation look very much like the large institutional money managers that they are. Ian, is this the era for niche asset managers?

IAN LIDDLE: Well, certainly there are a lot of niche managers around today and maybe it’s partly a function of the markets being where they are, so I think the one thing is that obviously the performance of the niche managers will differ vastly, so I’m sure that there will be a few boutiques that will beat us over the next few years, if they pick just the right portfolio but I would hope that there are many boutiques that we are going to beat. So the trick is really if you want to; a) invest with a boutique manager which one do you invest with and how do you chose the boutique that’s going to be the winner?

HANNA BARRY: Off the back of that do you expect to see some consolidation among boutique asset managers?

IAN LIDDLE: I don’t know. It will probably be a function of markets. If the markets were to consolidate or fall, you could see that over time.

HANNA BARRY: We’ve seen a huge increase in the number of listed property stocks over the last year even especially with the category of real estate investment trusts being introduced and that’s really been a booming sector. Do you think that that boom is going to continue, we’re going to continue to see a number of new listings and that there is good value to be had from listed property?

IAN LIDDLE: No. No to all the questions. So you’re right, there has been a real boom, but I think one must be careful to look at where the performance has come from, so a big chunk of the performance that one has achieved from investing in the property stocks hasn’t come from the underlying performance of the properties themselves or from growth in net rental income, but it’s come from a rerating of the sector meaning that people are paying, have been paying higher and higher prices for each rand of net rental income over time. And it’s also come from leverage and we know that there’s a property cycle, it’s not going to go up forever and while leverage works amazingly well in the upcycle it obviously catches you out in the down cycle. So we see lots of risks especially in the South African property sector at current prices.

HANNA BARRY: Allan Gray made some significant changes to its equity fund fairly recently, which we discussed earlier. It took a long time for it to make, or a lot of consideration certainly and it did get investors to vote on these changes. One of the changes involved has allowed the fund to invest up to 25% in global equities having previously had no offshore investments in the fund. What is the equity fund’s exposure currently to global equities?

IAN LIDDLE: It’s currently at around 5% or 6% and so that’s obviously up from the last quarter end and it’s – we’ve been increasing it since the mandate allowed us to do so and the reason for it is really that we find global equities more attractive in general than South African equities, especially the opportunities that Orbis is able to find globally, and it also provides good diversification for the fund.

HANNA BARRY: Do you expect to increase this to the maximum 25% in the coming year?

IAN LIDDLE: I’m not sure about the coming year, we don’t have to make that decision immediately. Obviously in order to increase our foreign exposure, we have to sell South African shares and we’re only going to do so when we think the time is right and the price is right to sell. So we’re not in a mad rush, but over time we’ll probably get there.

HANNA BARRY: And one of the reasoning’s for this – you mentioned the opportunities that the Allan Gray Orbis Fund is able to find in global equities a number of market commentators have been repeating the phrase that our local market is expensive, it’s very stretched and we are in for a correction fairly soon. Are you of that view?

IAN LIDDLE: It worries me that so many people say it, because the market has a habit of proving the majority of people wrong. So I think the one curve ball that could come in for South Africa is to do with the value of the rand. So remember that a big chunk of our market is actually multinational companies, which account for a large part of the percentage composition of the indices. And because they’re multinational companies they tend to be priced in dollars and they make big chunks of their profits overseas and they’re priced in dollars. And so if the rand were to be really weak, it might be that the dollar price has fallen but that’s more than made up for by a weak rand. And that’s what makes asset allocation for me, quite hard in South Africa at the moment, because on the one hand you’ve got high dollar prices, but on the other hand I think you’ve got a currency which is vulnerable in the long term.

HANNA BARRY: On that note, difficult environment to navigate. The active versus passive debate rages on and probably will continue to forever and a day. Many people arguing that passive investments outperform the majority of active investments in the long term, if for no other reason in that the fees are of course much lower, or often are much lower. Do you agree, do you think that this is an environment that active management is needed because it is so volatile, or do you think that most retail investors are better off in a passive investment vehicle?

IAN LIDDLE: That’s a good question. I think in any environment stock markets need active investors. If you just take it to an extreme what kind of stock market would we have if it was 100% invested in by passive investors. So the contribution that active investors bring is that they bring more efficient pricing to stock markets, they’re competing with each other, they’re trying to form the most accurate assessment of companies’ values that they can and that is really a service, which results in good pricing or efficient pricing for stock markets, which makes it an attractive place for companies to raise capital, etc. It’s sort of a key part of the capital system, so I think there’s always going to be a role for active managers and it’s a very important role. But then having said that there’s probably a space for passive funds too and certainly the market share of passive funds in South Africa is low compared to some other countries such as the UK or the US. So I wouldn’t be surprised if we were to see passive funds continuing to grow in South Africa.

HANNA BARRY: Independent minded is of course Allan Gray’s motto and that’s what it has been known for and is perhaps still known for. But can you still be independent minded when you’re as big as Allan Gray is?

IAN LIDDLE: Yes. I think definitely so.


IAN LIDDLE: So I think it’s very firmly entrenched in the DNA of the company and the people who work here, but perhaps it’s easier to be different from the crowd and maintain your independence when you’re not a listed company and you’re a privately owned business. You’re not subject to quarterly reporting or half yearly reporting pressures and you can afford to take a longer term view than perhaps other people would allow you to do.

HANNA BARRY: Finally Ian, in this uncertain volatile environment, what is your message to Allan Gray investors?

IAN LIDDLE: Well I guess the key thing to think about is the amount of risk that you’re exposed to and whether you are happy with that level of risk given that markets have been moving pretty much one way and that’s up over the last six years. I think all investors should pause to think whether their exposure to markets which have been trending strongly up is still appropriate and to consider to what extent they could suffer losses in their current portfolio. So I think it’s good to stop and reassess these things every now and again and that would probably be a good idea now.

HANNA BARRY: Ian Liddle is chairman and chief investment officer of Allan Gray.



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