‘We are still finding opportunities, which to us suggests that it is not necessarily time to be reducing equity exposure by too much.’
Allan Gray still sees many opportunities in parts of the South African equity market despite recent strong gains, Allan Gray portfolio manager Tim Acker said in a video posted on the fund manager’s website.
Acker was providing an update on the performance of the R145.5bn Allan Gray Balanced fund, which he co-manages with Duncan Artus, Jacques Plaut and Rory Kutisker-Jacobson.
Cut back on equities?
Acker said it was reasonable for investors to ask whether the fund should substantially reduce its equity exposure given the gains in JSE-listed shares since the Covid-19 pandemic crash in March last year. However, he added this required a nuanced response.
‘It is important to remember that a lot of the strength of the local market has been driven by a handful of sectors. So, for example, the big mining companies have performed very well, and some of the global industrial companies like Richemont have also done well,’ Acker said.
‘Comparatively, the rest of the market has been quite weak. We are still finding enough opportunities, which suggests that it is not necessarily time to reduce equity exposure by too much.’
The team was also still seeing opportunity in South African fixed income.
‘The fund’s holding of government bonds is higher than it has been in recent years, to take advantage of the steep yield curve where yields are high on the long end,’ Acker said.
Foreign investors are returning
Turning to the Covid-19 tumult, Acker said that last year many foreign investors exited South Africa. However, he said they returned as South African assets were too cheap.
‘After Covid-19, everything was very depressed, and the market was pricing in a worst-case scenario, which subsequently has not quite transpired. An example of this would be the South African banks. For the past 12 months, the market implied that credit losses from loans would be as bad, maybe even worse than during the 2008 financial crisis.
‘Our view was that this was too pessimistic and things would not be that bad. So far, when we look at the credit losses realised, it has not been that bad, and the banks have performed very well. The banks are up 50% over the last 12 months but coming from quite a low starting point. The banks’ index as a whole is still lower than what it was before Covid-19. The banks remain a significant position in the fund,’ Acker said.
The Allan Gray Balanced fund has a 1.9% allocation in Standard Bank and 1.8% in FirstRand.
Local retailers
Turning to local retail stocks, Acker said that clothing retailers such as Foschini and Mr Price had enjoyed an even sharper recovery than the banks. In many cases, the share prices of these businesses were higher than before the onset of Covid-19.
‘The fund has been trimming its exposure to those positions and redeploying the capital to more attractive opportunities.’
The fund has 2.6% of its money allocated to Woolworths.
The Allan Gray Balanced fund returned 17.1% over the year ended June compared with 17.6% for its benchmark, which is the market-value-weighted average return of funds in the South Africa multi-asset high equity company excluding Allan Gray funds. Over five years, the fund has returned 5.6% versus the benchmark 6.0%, while over 10 years, the return is up 10% compared to the benchmark’s 9.1%.