NAV on 2019/05/21
|NAV on 2019/05/20
|52 week high on 2019/04/29
|52 week low on 2018/05/23
|Total Expense Ratio on 2019/03/31
|Total Expense Ratio (performance fee) on 2019/03/31
Allan Gray Unit Trust Management (RF) Pty Limited
South African--Multi Asset--Low Equity
Daily interest rate as supplied by FirstRand Bank Ltd.
Allan Gray Optimal comment - Dec 18
2018 was a very disappointing year for asset prices with all major global asset classes giving negative returns. Locally the FTSE/JSE All Share Index (ALSI) returned -9%, while the MSCI World Index returned -8% in US dollars. The Optimal Fund returned 6.2%, in line with its objective to offer returns that are not correlated to asset price returns. During the fourth quarter the Fund increased its net equity exposure from 4.4% to 13.9%. This is close to the highest net equity exposure the Fund held of 15.4% in 2003 (the Fund also briefly had 15.4% net equity exposure in November 2018). There are two reasons for this: The stock market is attractively priced now and the Fund’s net equity component should add (detract) to performance if markets go up (down). These two factors are discussed further below.
One way of thinking about future returns for the stock market is the current dividend yield plus an expected annual growth in dividends plus an expected change in investor sentiment. In the long run the dividend yield on the ALSI averaged around 3% and you could expect companies to grow at around 8% for a total return of 11% p.a. - excluding changes in sentiment. The current dividend yield of the ALSI excluding Naspers is 4.3%, in line with the peak in 2003 when the Optimal Fund had its peak exposure to equities. If earnings grow by 8% p.a. investors are in for a 12.5% total return before changes in sentiment are taken into account. How could sentiment impact this return? To judge the potential impact of sentiment we could consider where the current dividend yield is within its range. The highest dividend yield on the ALSI (excluding Naspers) in the past 20 years was 5.5% during the global financial crisis. If the ALSI were to return to that yield over a four-year term the change in sentiment would reduce the total return from 12.5% to 7.9% p.a., still a decent return ahead of inflation. If our stock market returned to its average dividend yield of 3% over the next four years the total return would increase from 12.5% p.a. to 23.6% p.a. If the dividend yield decreased to a low of 2% the return increases further to 36% p.a.
The last scenario illustrates why it could be risky for the Optimal Fund to hold a low net equity position: the Fund performs better when the stock market falls and worse when the stock market is increasing. This is because it is currently overweight defensive companies and underweight cyclical companies. Therefore a higher net equity weight gives some protection to Fund returns when asset prices are strong. During the quarter the Fund’s exposure to British American Tobacco and Woolworths was increased while its exposure to MTN and Netcare was reduced.
Commentary contributed by Ruan Stander
The Fund invests mainly in selected shares and it uses exchange-traded derivative contracts on stock market indices to substantially reduce its net equity exposure to within a range of 0-20%. As a result, the Fund's return depends on the level of short-term interest rates (implicit in the pricing of the sold futures contracts) and the performance of the Fund's selected shares relative to the stock market index. The Fund's return is therefore unlikely to be correlated with equity market returns. In addition, a portion of the Fund is typically invested in cash and margin deposits.