All investments carry risk.  While we define risk as the permanent loss of capital, it can also refer to the chance that an investment’s actual return will differ from what is expected.  What should you expect from us?


At Allan Gray, we take a contrarian approach, apply it consistently and invest for the long term. We scrutinise opportunities that aren’t necessarily obvious which means  our Funds can look markedly unlike those of our peers. But being different does not necessarily mean substantially increasing the amount of risk associated with a portfolio. Some may conclude that in fact it’s risky not to ensure there is true style diversification in client portfolios.

Does being different – or a contrarian fund manager – lead to much higher levels of risk?

We do expect the Allan Gray Australia Equity Fund to deviate significantly from the market average. That’s what we aim to deliver. We don’t aim to deliver average index returns. Let’s have a look at some of the risk measures and understand the Fund in more detail.


Tracking error, sometimes referred to as active risk, measures how closely the portfolio’s returns follow the returns of the benchmark. In active asset manager selection, we believe higher tracking error may be desirable. It indicates a return profile that differs from the market average, and therefore, may provide a less correlated source of returns. An active manager displaying very low tracking error should cause an investor to question why they are paying active fees, for a benchmark-like return.  Being different to the market is what gives rise to tracking error and therefore it is a necessary outcome so as to avoid the mediocrity of index returns.

Active share looks at the portfolio holdings, rather than the past return profile, to assess the extent to which an investment portfolio differs from its benchmark index. It can range from 0% to 100%, with a 0% active share indicating that holdings are identical to the benchmark, and 100% active share indicating no overlap at all. Again, we see high active share as a beneficial attribute of an active manager, indicating a greater the level of differentiation from the benchmark. 

Volatility as a risk measure. As with tracking error and active share, volatility as a risk metric is at times misunderstood, and does have some drawbacks as a risk metric. It is a measure of how much returns deviate from their own average over a period of time. Volatility is often used as a proxy for risk, but it should be remembered that upside volatility, or outperformance, has an equal contribution to the calculation as downside volatility, despite upside volatility likely being a desired outcome of investors. The volatility of the Allan Gray Australia Equity Fund was materially higher than the S&P/ASX 300 Index in six out of seventeen financial years (2009, 2010, 2018, 2020, 2021 and 2022).  In four out of six of these years, the Equity Fund outperformed S&P/ASX 300 Index, net of fees.

Should one expect the Fund to experience larger drawdowns than the market average?

The worst drawdown for the Allan Gray Australia Equity Fund to date occurred in the late stages of the global financial crisis. The Allan Gray Fund experienced a larger drawdown than the S&P/ASX 300 Index and a smaller drawdown than the S&P/ASX Small Ordinaries Index. However, the Fund also took significantly less time to recover than the market indices. This is illustrated below.

Performance of $100 from market peak (drawdown and recovery)

Source: Morningstar Direct and Allan Gray Australia as at 30 June 2023

Are you really different? Being true to label

The following chart shows the average top ten holdings of the five largest Australian equity managers that describe themselves as active managers (as opposed to passive, index-tracking managers). It compares these holdings with those in the S&P/ASX 300 Index as well as our Equity Fund portfolio. As you can see, the average of the five largest Australian equity managers’ portfolios look similar to the index, whereas our portfolio looks very different.

Top 10 holdings vs the index

Source: Morningstar as at 30 June 2023. Five largest active managers as measured by fund size from the ‘Equity Australia Large Blend’ ‘Growth’ and ‘Value’ categories.

How can a contrarian approach help reduce risk in total portfolios?

Increasing the chance of upside

Taking a contrarian approach improves your chance of paying a lower price and therefore achieving a better-than-average return. It also helps avoid speculative overoptimism, where stock prices rise too high, thereby increasing the risk of overpaying.

Tempering the impact of market bubbles

At different times, investor sentiment can drive investment prices far above their rational economic value. Once this becomes apparent, the bubble bursts and the race is on to sell investments.  By investing independently of general market sentiment, contrarian investing can potentially help investors avoid the pitfalls of market bubbles.


A genuine contrarian managed fund can provide an attractive alternative to traditional Australian equity funds. The vast difference in approach – and investments – can provide real diversification for investors.

Opportunities from behavioural errors

If being a contrarian investor yields so many positive outcomes, why isn’t everyone doing it? The answer is because it’s hard. Behavioural studies show how psychological and emotional factors impact economic decisions, and that by nature, people tend to conform. By understanding how human behaviour can be an investor’s worst enemy, the contrarian investor has processes in place to ensure these natural biases do not impede investment decisions.

In conclusion

All investments carry risk, and risk is what we assume as investors in order to generate the returns we seek. It is true to say that the Allan Gray Australia Equity Fund is much more concentrated than the broader index, and it is also true that we don’t always get it right. Our success ratio as at 30 June 2023, that is, the ratio of outperforming stocks owned, calculated relative to the S&P/ASX 300 Index is 63% since inception, meaning that 37% of our holdings have underperformed the index. The Fund has high tracking error, and active share, so if risk is viewed from a lens of being different to the index, one may consider the Fund ‘risky’.

But we view risk in absolute, rather than relative, terms, and believe a much better definition of risk is a permanent impairment of shareholder capital. This is the risk we concentrate on and look to minimise through careful, fundamental analysis and portfolio construction.

One must balance shorter-term measures of risk, such as volatility, against the long-term risk of not generating adequate returns to meet one’s investment goals and objectives. Assuming additional concentration risk in particular holdings has allowed the Allan Gray Australia Equity Fund to generate substantial annualised outperformance of 2% after fees, relative to the S&P/ASX 300 Index over the past 10 years, and 1.9% over the past 15 years, benefitting those who have stayed the course and weathered the occasional bout of relative underperformance.


A detailed research paper is available if you would like more information. Advisers can contact their local BDM to discuss further and get a copy of our research paper.


This content is issued by Allan Gray Australia Pty Limited ABN 48 112 316 168, AFSL No. 298487. Equity Trustees Limited ABN 46 004 031 298, AFSL 240975 is the issuer of units in the Allan Gray Australia Equity Fund.  This information is of a general nature and is not an offer to sell, or a solicitation to buy, interests in any financial products.  Neither Allan Gray Australia, Equity Trustees nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it.  Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before deciding about whether to invest in this product.

The Allan Gray Australia Equity Fund Target Market Determination is available at or directly here.  A Target Market Determination is a document which is required to be made available from 5 October 2021. It describes who this financial product is likely to be appropriate for (i.e. the target market), and any conditions around how the product can be distributed to investors. It also describes the events or circumstances where the Target Market Determination for this financial product may need to be reviewed. September 2023.