Allan Gray Stable comment - Jun 19
Sam Hinkie, a long-time advocate of using analytics to improve the performance of American sports teams, was recently asked what he believed was the best source of asymmetric outcomes. His answer was, patience, or the ability to prioritise the long term over the short term.
Patience is a central part of Allan Gray’s investment philosophy. We invest in companies that maximise long-term shareholder value and are run by management with a similar philosophy. We buy these companies when negative short-term issues push market prices below fundamental value. The patience to focus on the long term is a key source of outperformance for ourselves, as investment managers, our clients, as investors, and management, as company leaders.
An unfortunate consequence of patience is that we may be wrong in the short term. This happened recently, with the prices of many of the Fund’s holdings falling over the last year. In some cases, we had made mistakes and have adjusted our view. In other cases, we believe the value of the businesses remains materially higher than market price, and that patient investors are being offered increasingly attractive long-term rewards. We have held or added to these positions.
Glencore is a relevant example. Many mining companies are experiencing positive tailwinds, with BHP Billiton, Anglo American and the gold and platinum miners among the best-performing local shares over the last year. In contrast, Glencore’s share price has fallen by 25%. The Fund is overweight Glencore and underweight the other miners, the combination of which has been a significant detractor to short-term performance.
There is a lot to like about Glencore. Management are long-term shareholders in the business and act accordingly. A large portion of its profits comes from a marketing business that earns a high return on capital and converts most of this into cash flow. Glencore focuses on commodities that are less exposed to the Chinese credit boom, suggesting its earnings are more sustainable than those of similar companies. It operates in geographies that many view as too hard, which should allow it to earn above-average returns.
Glencore’s strategy prioritises long-term value but comes with risks - some of which are dominating current headlines. The most concerning of these are regulatory investigations into Glencore’s business practices in Africa, and the company’s reliance on coal, an environmentally sensitive commodity. The recent prominence of these risks caused us to interrogate our investment assumptions and consider alternative perspectives that may identify possible mistakes. We concluded that Glencore’s long-term value remains significantly higher than the share price. We expect management actions and cash flow generated by the business to close the gap between price and value, but this takes time. While it is painful to wait, opportunities such as these maximise returns for patient investors. Over the quarter, the Fund added to existing positions on price weakness, including Sasol, Sappi and KAP. The Fund sold banks and Naspers. Asset allocation was kept similar with high exposure to undervalued equities, which we believe offer our clients the best probability of meeting their long-term goals. Fixed income duration was increased marginally at attractive yields. Gains were realised on US dollar-denominated African bonds that were bought when pricing in excessive pessimism and sold after benefiting from global yield compression.
Commentary contributed by Mark Dunley-Owen
The Fund invests in a mix of shares, bonds, property, commodities and cash. The Fund may buy foreign assets up to a maximum of 25% of the Fund (with an additional 5% for African ex-SA investments). The Fund typically invests the bulk of its foreign allowance in a mix of funds managed by Orbis Investment Management Limited, our offshore investment partner. The maximum net equity exposure of the Fund is 40%. The Fund's net equity exposure may be reduced from time to time using exchange-traded derivative contracts on stock market indices. The Fund is managed to comply with the investment limits governing retirement funds. Returns are likely to be less volatile than those of an equity-only fund or a balanced fund.