Quarterly Fund review – June 2022

In this extract from our June 2022 Quarterly Commentary, Julian Morrison, CFA, our Investment Specialist, reviews the performance of the Allan Gray Australia Funds. Click here to read the full Quarterly Commentary.


Allan Gray Australia Equity Fund

The Australian share market fell during the June quarter, with the S&P/ASX 300 Accumulation Index down 12.2%. The Allan Gray Australia Equity Fund Class A was also down this quarter, by 12.7%, moderately underperforming the benchmark.

During the quarter, positioning in the Energy sector was the largest positive contributor, followed by some share-specific holdings in the Financials sector. Woodside Energy Group, Worley and Santos were leading contributors within the Energy sector. Origin Energy also contributed positively, though it is officially categorised within the Utilities sector.

Within the Financials sector, QBE Insurance Group, Challenger and AMP all contributed positively to relative returns. Challenger and AMP in particular outperformed the broader Financials sector.

Despite recent performance, we believe many of these names remain attractive versus the broader market, and so retain meaningful positions within the Fund. We have, however, trimmed all these positions other than AMP.

Positive contribution by the above-mentioned names was offset primarily by underperformance within our selected Materials holdings. In particular, the main detractors included Sims, Alumina and Newcrest Mining. We still see significant value in these companies for the Fund and added to positions in Alumina and Sims during the quarter.

We have generally avoided Healthcare companies in recent years given excessive valuations, which has contributed positively over most of the last year, however, the broader Healthcare sector outperformed during the last quarter and our underweight position therefore was a detractor for that period. We do however hold Ansell, which sits within the Healthcare sector and was featured in our last quarterly report. During the quarter, we continued adding to Ansell, which has been an outlier in terms of its underperformance versus some of the more popular Healthcare sector shares. Importantly, we believe it offers much better value than the market based on our bottom-up company valuation and we continued to add to the position during the quarter.

Elsewhere, the absence of exposure to Information Technology companies continued to aid relative performance, as that sector underperformed meaningfully for the quarter. Despite some of these companies coming off their highs recently, we still do not own any Information Technology shares at the time of writing this report.

We continue to observe market dislocation, and major dispersion between what looks to be good value versus overvalued. Therefore, there has not been a dramatic change in what we see as the most attractive investments for the
Fund. We continue to manage to appropriate position sizes – generally trimming positions on strength and adding when weaker prices present value. Our investment team maintains a continuous research agenda for new ideas – and those which offer the best value may just make it into the portfolio.


Allan Gray Australia Balanced Fund

The Allan Gray Australia Balanced Fund returned (7.7%) for the quarter, marginally underperforming its composite Benchmark, which fell 7.6%.

Share selection in global shares contributed positively to relative performance for the quarter, more than offsetting a slight detraction from exposures to Australian shares. However, share selection outperformance was countered by our overweight position in equities, which detracted from relative performance.

The Fund had just under 70% in shares on average during the quarter. This is after accounting for about 8% of the global share exposure being reduced through the use of exchange-traded derivatives, which allows for some protection in those periods where market indices fall. This added positively to returns during the period, as markets were generally weak for much of the quarter.

During the quarter, the Fund also held around 19% in fixed income securities and cash and a 5% exposure to gold through an exchange-traded fund. The fixed income allocation has remained significantly shorter in duration than the benchmark – at around two years versus more than seven years for the benchmark.

This means that the fixed income portion of the Fund remains more defensively positioned than the benchmark (in terms of both relative and absolute returns), in the event that interest rates rise from current historically low levels. Longer-term interest rates did indeed rise further during the last quarter. Therefore, this positioning again contributed positively to relative performance.

As with the Equity Fund, we believe potential portfolio value relative to the market is significant and we continue to manage for risk with a long-term, valuation-driven perspective.


Allan Gray Australia Stable Fund

The Allan Gray Australia Stable Fund returned (3.7%) for the quarter, underperforming its Reserve Bank of Australia cash rate benchmark – which returned 0.1% for the quarter.

The Fund has been lightening equity exposure for some time now, which has held the Fund in good stead during recent volatility. Nevertheless, the pronounced weakness of equities contributed to underperformance in the most recent quarter. We continue to manage exposures to what we believe is a prudent level, and to hold allocations to what we see as the most attractively valued shares identified by our research.

As at the end of June, the Fund had 26.7% invested in ASX-listed securities (of which around 25.1% was equities and about 1.6% selected hybrid securities). The remaining approximately 73% is held in cash and money market investments. This can be seen in the graph below, which shows our allocation to ASX-listed securities over time.

The Stable Fund aims to add value from both our disciplined share selection, and from the decision on how much to allocate to ASX-listed securities versus cash. This provides the Fund with great flexibility to manage risk throughout the market cycle, while still seeking to add long-term returns above cash. We believe the current environment provides an opportunity for this Fund to demonstrate its intended benefits. It offers a low to moderate risk/return profile, with the potential to outperform cash over the long term, while having the advantage of simplicity and ease of understanding.



Julian Morrison holds a Bachelor of Arts (Honours – University of Sheffield) and the Chartered Financial Analyst designation.