In this extract from the September 2019 Quarterly Commentary we review the Allan Gray Australia Funds over the last quarter. Click here to read the full Quarterly Commentary.

Allan Gray Australia Equity Fund

The Australian share market was up 2.6% for the third quarter, having fallen during August, but recovering to near all-time highs by end September.

The Allan Gray Australia Equity Fund outperformed its ASX 300 benchmark by 1.8% for the last quarter, despite further underperformance in some of the sectors where we have larger exposures. While energy was again one of the weaker sectors (+0.1% for the ASX300 Energy Sector), some of our energy positions bucked the sector trend, with Origin Energy in particular contributing positively. Materials was also one of the weaker sectors, but again our stock selection there contributed positively, with Newcrest and Alumina contributing to outperformance.

In contrast, our largest energy position Woodside Petroleum was the largest detractor from performance. The weakest area of the market from a sector basis was communication services, and our exposure there to Telstra also detracted from performance.

Allan Gray Australia Balanced Fund

The Allan Gray Australia Balanced Fund underperformed its composite benchmark by 0.4% in the third quarter. Overall equity exposure contributed positively to relative returns. Part of the global share exposure is hedged, which detracted from returns as the market rose, but which should provide some protection in those periods where market indices fall. The Fund has around 67% in equities but including the hedging, the total net equity exposure is 59%.

The Fund’s exposure to gold contributed positively during the quarter as the gold price rose.

For the roughly 28% of the portfolio currently invested in fixed income and cash, we remain significantly shorter in duration than the benchmark – at around one and a half years versus around seven and a half years for the benchmark. This detracted from relative performance in an environment of falling interest rates. However, the Fund should be more defensively positioned than the benchmark in terms of both relative and absolute returns, in the event interest rates rise.

Allan Gray Australia Stable Fund

The Allan Gray Australia Stable Fund outperformed its RBA cash rate benchmark by 1% in the third quarter.

The performance of the Stable Fund is driven by the performance of our favoured Australian share holdings, and the decision on how much is invested in shares versus cash. The exposure to shares can range from zero to 50% of the Fund, and the allocation over time is illustrated by the red shaded area in the graph below. As the share market has risen strongly over the course of the year, we have reduced the Fund’s overall exposure to shares. At the end of the third quarter, exposure to selected shares remains around the lowest in the history of the Fund at around 23%. We have, however, added to positions in out of favour shares, such as Woodside Petroleum, where we believe the price is too low and good value is on offer.

Stable Fund portfolio weightings – equity allocation falls when there is less value in equities


Stable Fund Chart

Source: Allan Gray Australia as at 30 September 2019