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 - Sep 19
The past year has been particularly disappointing as we strive to grow our clients’ wealth, while exceeding market returns. The recent poor performance was a result of only a few of our holdings contributing positively to performance, while a number of the shares in the portfolio performed poorly. These periods of underperformance are a normal part of our investment philosophy and have occurred before. During times like this, the important thing is to be consistent and consider each holding on its merits based on the underlying value, just as we always do. The recent underperformance makes us more excited about the future, as the single most important factor determining investment returns is the price you pay. We are now paying less for the assets in the portfolio than we were a year ago. This bodes well for future returns. Below I touch on a few of the significant detractors from performance.
Sasol has been the largest detractor by far. The share has contributed a negative 4.2% to the Fund over the past 12 months. Since we discussed Sasol in the June commentary the share has fallen 28%. The underlying profit drivers are basically unchanged and, if anything, the fundamentals for the oil market are looking slightly better. Unfortunately, the Sasol board announced the delay of the release of their annual financial results, first on 16 August and then again on 6 September. The reason given was the time required to complete an independent assessment of internal control weaknesses and therefore the annual audit process. This is clearly disappointing and reflects very poorly on the company but, to our mind, does not fundamentally change the company’s value. As we noted in June, we think the negative sentiment towards the oil industry, and Sasol in particular, is overdone, and we believe the valuation is very attractive. Interestingly, on a three-year view, Sasol is only a very marginal detractor, as we sold a third of our holding in the second half of 2018 and early 2019 at prices well above our cost.
Another significant detractor was British American Tobacco (BAT), which contributed a negative 0.6% to the Fund. Unlike Sasol, the underlying business has performed well, earnings grew 9% over the past year and ITC, the Indian associate whose market price equates to 16% of BAT’s share price, grew underlying earnings by 15%. However, market sentiment has turned decidedly negative towards tobacco companies and the price-to-earnings multiple has de-rated from 14 to 11.2, leading to a 16% price decline. We have used this opportunity to selectively add to our position. In fact, we have used the price weakness in a number of our holdings to add to our positions.
Similarly, mining company Glencore detracted 0.7%. We have steadily increased our holding over the past year as the price has fallen from R61 to R46. Our estimates of normal earnings and fair value are unchanged. We think the prices of the commodities Glencore produces (except nickel) are below normal and therefore cash flow is below normal. Despite this, Glencore can comfortably cover its 6.5% dividend yield. The share should reward investors for their patience.
We sold Impala over the past quarter, taking advantage of the 250% price rise over the past year, and invested the proceeds in Naspers and FirstRand.
Commentary contributed by Andrew Lapping
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.