Allan Gray Optimal Comment - Mar 20
The first quarter of 2020 will most likely be talked about for a long time and become a counter example to how asset prices are expected to behave in absolute terms, as well as on a relative basis. COVID-19, which originated in China, is spreading rapidly across the world, resulting in many deaths and sending most economies into lockdown, wreaking havoc with company balance sheets and the global financial system at large.
Global asset prices have declined across the board, with the FTSE World Index down 22%, the FTSE/JSE All Share Index down 21%, and even the JSE All Bond Index returning -9%. The Optimal Fund fared slightly better, with a return of -4% for the quarter.
Some of the longstanding investors in the Fund may be disappointed by the negative return for the quarter given performance during previous downturns. We have historically maintained a 5% net equity position in the Fund, only increasing under specific circumstances and when presented with substantial opportunities. Unfortunately, given that the market was down 21%, this reduced the Fund’s return by 1%. Sasol’s share price fell by 88% during the quarter and detracted 1.3% from the returns of the Fund. Russia and Saudi Arabia couldn’t agree on production cuts, resulting in both countries increasing production, on top of the coronavirus-induced drop in demand. This sent oil to below US$30 per barrel, putting pressure on Sasol and bringing into question the company’s ability to stay solvent for a long enough time to enjoy the fruit of a recovered oil price. Our other resources-active positions detracted as well, on average. BHP, one of our largest underweights, outperformed the market. Surprisingly, iron ore was one of the very few commodities to not be affected by the economic lockdowns, despite China being its largest customer and construction projects reducing substantially. Glencore underperformed further despite a very cheap valuation. Going forward, it is clear that COVID-19 will significantly impact the global economy and we are working hard to establish how this will impact the various overweight and underweight positions in the Fund. For now, we have not increased the net equity exposure, but we will continue to evaluate this option, together with the opportunity set in our over- and underweight positions.
During the quarter we sold Naspers, Momentum Metropolitan and Aspen and bought BHP (slightly reducing our underweight), Absa and Sibanye-Stillwater. Our most significant overweight positions are British American Tobacco, Naspers and Glencore.
Our most significant underweight positions are Anglo American, Richemont and BHP.
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.