In it for the long haul
The fund aims to create long-term wealth for investors. Its goal is to outperform the average return of South African General Equity Funds over the long term, without taking on a greater risk of loss.
Fund manager insights:
The Allan Gray Equity Fund is for investors who are looking to create long-term wealth by investing in shares. Historically, equities have been the best way to generate real returns, says Andrew Lapping, chief investment officer of Allan Gray.
The fund’s returns are likely to fluctuate significantly over the short to medium term, but this should not concern long-term investors, says Lapping. According to him investors should also be comfortable with price volatility. “One of the most commonly applied definitions to risk in investing is that of equating risk to volatility and at Allan Gray, we define risk as the probability of a permanent loss of capital,” says Lapping.
“We manage this risk by buying assets that we consider to be priced below their intrinsic value and sell them when we think they have reached their worth – regardless of popular opinion.”
According to Lapping, sentiment towards South Africa generally, and the equity markets in particular, is sinking steadily lower. Economic growth has slowed with the end of the commodity boom and government policy uncertainty is discouraging both local and foreign investors.
The local equity market has remained practically unchanged over the past three years, as earnings have generally undershot expectations.
“But, for the first time in many years, we are beginning to find opportunities in certain domestic consumer businesses outside financial services,” says Lapping.
With regard to the fund’s investment philosophy, he explains that “we spend our time valuing businesses”.
“We then compare the price the market places on those businesses to what we think they are worth. We look to invest in the businesses that are undervalued by the market. The market can sometimes misprice assets by focusing on short-term issues or not fully understanding the business. We look to take advantage of these opportunities.”
He says they do not consider the benchmark, which means their portfolios are often very different.
“And, most importantly, if we think a share is expensive, no matter how large this share is in the benchmark, we will not own it. This helps us protect our investors from permanent capital losses,” Lapping explains.
Why finweek would consider adding it:
The fund has created wealth for its long-term investors. Since inception and over the latest 10- and five-year periods, it has outperformed its benchmark. Its returns have also exceeded consumer inflation by a significant margin.
The maximum drawdown and lowest annual return numbers show that the fund has successfully reduced downside risk in periods of negative market returns. ■