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 - Jun 19
The Equity Fund had a poor quarter, returning -3.2% while the benchmark returned 0.1%. On the local front, the major detractors have been our overweight positions in British American Tobacco and Sasol.
Sasol is currently trading on eight times earnings. The long-term average is 10.5 times. A simple multiple re-rating from eight to 10.5 would give a return of 31%. Then in 2022, if all goes to plan, earnings should grow by 45% when its large project in the US (the Lake Charles Chemicals Project or LCCP) is fully up and running. This is not the whole story. Investors in Sasol have to carefully consider all of the following:
-Much depends on the oil price, which is difficult to forecast. On the supply side, US production has grown rapidly over the past few years, and the US is now the world’s largest producer. Demand growth has historically been very consistent but, in the long term, the impact of electric cars will be negative for oil. -Sasol is a very large emitter of carbon dioxide and sulphur dioxide. -The company has incurred a huge amount of debt in order to build their ethane cracker in the US. The balance sheet is currently stretched. -Capital allocation has been poor historically. One barrel of oil currently trades for about R1 000. For the same price, you can buy 2.7 Sasol shares. This ratio was similar 20 years ago: In 1999, you could buy 2.7 Sasol shares for the price of one barrel of oil. One would have expected Sasol to become more valuable relative to oil, given the billions of rands that have been spent on expansion projects in the past 20 years. -Management has lost a lot of credibility in recent years. Shareholders were short-changed in the company’s recent BEE deal. Costs have been disappointingly high. The ethane cracker has had multiple cost overruns.
These points seem (and are) alarming, but in fact, almost every company has a similar list. It is our job to worry about these things, to incorporate them into our valuations and, where we can, to encourage companies to pollute less and act in shareholders’ best interests. We do not sell shares on bad news or buy them on good news. Rather, we buy when we think we are getting a bargain for our clients. Sometimes, negative sentiment can create a good buying opportunity.
It is interesting to compare the valuation of Sasol with that of Anglo American Platinum or Amplats (which we don’t own). Everything has gone right for Amplats in recent years, and sentiment is extremely positive towards the company. Both companies have a similar market cap: around R220bn. Over the past 10 years, Amplats has made cumulative profits of R6.2bn. Sasol has made R210bn. One should see the issues at Sasol in the context of this very attractive valuation.
The foreign portion of the Fund also detracted from performance: It returned -0.2% in dollars, while the FTSE World Index returned 4%. Detractors here were biopharmaceutical company, AbbVie, and multinational tobacco company, Imperial Brands.
During the quarter, we increased our exposure to Glencore, and reduced our exposure to Richemont.
Commentary contributed by Jacques Plaut 30 June 2019 Minimum
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.