2015 is a year we will never forget. We started the year on the back foot with the devastating loss of our friend and colleague Simon Marais to cancer.
Simon was a great friend, and an inspiration to everyone in the Allan Gray business. He really was contrarian, an independent thinker able to uncover investment opportunities the rest of the market ignored.
One of his gifts was to find this skill in others, so he was able to attract great talent to Allan Gray. He had a knack for spotting like-minded analysts, fellow independent thinkers who could embrace the contrarian investment philosophy required to manage our funds. This is the legacy he leaves, while his positivity and passion for life will be sadly missed by us all.
We are deeply grateful to the clients who believe in our philosophy and our team and have stuck with us during this difficult time.
Sticking to our knitting
From a business perspective it doesn’t get much tougher than this. Our flagship Allan Gray Australia Equity Fund has underperformed this year and we are aware that we have tested the patience and understanding of our investors. The Allan Gray Australia Stable Fund has also not performed as well as expected, although it did outperform its benchmark.
It’s important for our investors to understand that we have stayed true to our investment philosophy. We haven’t changed tactics to try and recover in the short term. Our investment style means we are likely to endure periods of short-term underperformance, as we look to invest in shares that are out-of-favour with the market. These shares may have further to fall, and drag on short-term returns, but they also offer greater potential to outperform higher-valued peers over the long term.
This year is an example of short-term underperformance. Markets have been irregular (if there is ever such a thing as a ‘regular’ market!), because the shares and sectors that performed badly in previous years continued to underperform, while the shares that previously performed well continued to outperform. This is known as market trending.
This is irregular, as generally last year’s winners don’t tend to perform as strongly in the following years; they simply don’t have the capacity to produce the same amount of performance. As contrarian investors, the out-of-favour shares we hold have continued to be unpopular and prices have deteriorated, not recovered as we would have liked. We haven’t experienced this level of market trending since the technology boom.
On the plus side, in many respects the case for buying some of these cheaper shares is even more compelling than a year ago. Being true to our label, we seized the opportunity to increase holdings in our favoured shares while prices are even lower. We’ve topped up holdings in out-of-favour sectors such as energy and materials, which reduces our average purchase price and increases the likelihood of a long-term positive return.
Sitting on the right side of the fence
The shares we buy are usually at a depressed point in their cycles. One reason we invest in these companies is because when market expectations are low the situation only needs slight improvement for share prices to rise. For shares trading on high valuations the good news is already in the price – a slight reversion towards mean and the price could tumble.
We would much rather sit on the side that shows potential for significant price rises, not limited upside and potential falls.
Onwards and upwards
At Allan Gray we don’t usually make short-term predictions. It’s impossible to say exactly which share prices will rise and which will fall in 2016 and we won’t try. When we assess a company’s prospects we focus on the long term, what can be delivered over five years or more.
We also look to position Allan Gray as a company for long-term success. Simon Mawhinney took the mantle of managing director earlier this year, while retaining his key positions as chief investment officer and lead portfolio manager. Dan Abeshouse has also taken on more responsibility and is now co-portfolio manager of the Australia Equity Fund.
We recently grew our investment team by employing two new analysts. We have also added two new members to our distribution team.
Our funds have endured periods of underperformance before and it will happen again. That’s the nature of our contrarian investment style; we have to suffer short-term pain for long-term gain. But over the long term we have outperformed the market. Our strategy is tried and tested and has rewarded our investors for 40 years in South Africa and for almost 10 years in Australia. We believe it will continue to deliver over the long term.
JD de Lange holds a B. Proc Degree (University of Pretoria) and is an admitted attorney and CFP in South Africa.