50 shades of Allan Gray
EXPERT INSIGHT: COMMODITIES, MINERS EXPLAINED
The turnaround in commodity and miner prices since January has caught much of the market flat-footed. SA’s top fund manager, Allan Gray, gives some pointers.
The free fall in commodity prices and associated shares towards the end of last year and its subsequent rebound has scarred and confused investors to the point of insanity. So we asked recently appointed chief investment officer of Allan Gray, Andrew Lapping, to explain the world as he sees it to us.
One of the funds that Lapping oversees – the Allan Gray General Equity Fund – was overweight basic resources against the All Share Index as at the end of March, with an exposure of 21.2% versus the All Share’s 17.2%.
Diversified
The fund also held an additional 1.4% of the portfolio in “commodity-linked investments” which includes Exchange Traded Funds holding physical gold, platinum and palladium.
According to Lapping, the developments of the last eight months have been shaped by the collision of declining Chinese demand with increasing supply for most commodities.
“Mines take a long time to build and many of these were started in the good times, so supply has still been increasing, with copper being the most obvious of these. It’s also very hard and painful to reduce supply, and many operators will hold off as long as possible to do so because if you close down, it immediately benefits your competitors.”
But there are signs the balance is moving towards equilibrium. “Into the new year, metal prices rebounded – but are still very low – and we have seen investors who didn’t have commodity exposure scramble to get it. China has also stimulated demand temporarily,” says Lapping.
This has seen prices rise from “exceptionally cheap” levels, with many companies seeing its share prices double since the start of the year.
Sasol is the general equity fund’s largest single holding, accounting for 8.7% of the portfolio. “We think Sasol has a very strong balance sheet and will be able to withstand a sustained downturn,” he says.
Glencore is not a particularly big holding. “We think highly of management, and we like the trading arm of the business which generates good cash flow through the cycle and which acts as a buffer to the volatility in the mining business.”
Exposed to iron
BHP Billiton has far less debt, compared to Glencore, “but they are highly exposed to the iron ore price. We have been quite negative on the iron ore price because of over-supply and poor Chinese steel production”. On Anglo American, he was cautious. “Their plan to deal with debt hinges on being able to sell a whole lot of assets, and we are not sure if it’s a great time to be selling assets.”