Duncan joined Allan Gray in 2001 as an equity analyst after completing his Honours in Business Science and post graduate diploma in Accounting at the University of Cape Town. He is a CFA charter holder and was appointed a trainee portfolio manager in January 2003. As of 1 January 2005, Duncan was promoted to the position of portfolio manager and will be managing a portion of the balanced and equity portfolios of the segregated and life clients.
Allan Gray Equity comment - Mar 20
The first quarter of 2020 has been one of the most volatile in recorded history as markets have had to digest both a health and a potential financial crisis. There is a real human cost, which differentiates this from previous market declines. Many experts seem to disagree on the best method of response, but what we do know is that the short-term economic consequences are going to be severe - especially given the significant leverage in the world economy, which remains above 2008 levels. This may result in forced selling of assets to raise cash, causing markets to fall in a feedback loop.
Unfortunately, there have been very few, if any, places to hide in an equity fund. Large liquid shares, such as Naspers, Richemont and British American Tobacco, have outperformed as investors seek safe havens in businesses they believe have a very high probability of surviving the current environment without financial distress. However, it is not as simple as just buying so-called safe shares: Despite being one of the largest consumer staple companies in the world, ABI has fallen by 46% when measured in dollars year to date, mainly due to its high debt levels.
Many domestic shares, especially consumer-facing businesses, are trading at very depressed levels as the market discounts the very bleak economic outlook and uncertainty associated with containing the COVID-19 pandemic. Some companies’ revenue may go to zero over the short term. We expect banks and the government to support well-run and solvent companies that run into shortterm liquidity problems: It makes sense to do so from a long-term economic point of view. As hard as it is to visualise now, if we assume a more normalised economic environment and that South Africa handles the potential health crisis competently, there is amazing value to be found for long-term investors.
The obvious disappointment has been Sasol, which has declined significantly, and whose intrinsic value is less than we believed it to be. The cost overruns at the Lake Charles project resulted in a significant net debt position, leaving Sasol vulnerable to a collapse in oil and chemical prices. The company has announced several measures to strengthen its balance sheet. We will adjust our thinking as more information becomes available. We remain holders of the share.
The Investment team spends a lot of time thinking about the risks in the portfolio given that no one knows how and when this crisis is going to end. We have, where appropriate, limited the exposure to certain sectors and individual companies. We have kept our large exposures to Naspers and British American Tobacco, despite their relative outperformance, while selectively increasing the weighting to many shares whose prices have declined significantly.
Bull markets are born in moments of extreme pessimism and it is hard to think of a moment of greater pessimism than now. The Fund owns a lot of cheap equities in any scenario where the economy recovers.
The offshore portion of the Fund has helped protect against the significantly weaker rand but has not escaped the sell-off in markets around the world. Orbis is finding many opportunities, as one would imagine, given the extent of the sell-off.
Over the quarter, the Fund repatriated rands from the offshore portion of the portfolio and increased its exposure to selected domestic shares.
The Fund invests primarily in shares listed on the Johannesburg Stock Exchange (JSE). The Fund may buy foreign assets up to a maximum of 25% of the Fund, with an additional 5% allowed for African ex-SA investments. The Fund invests the bulk of its foreign allowance in equity funds managed by Orbis Investment Management Limited, our offshore investment partner. The Fund is typically fully invested in shares. Returns are likely to be volatile, especially over short- and medium-term periods.