PDF   Print
Allan Gray Balanced Fund —Fund News
Allan Gray Balanced comment - Dec 24 Fund Manager Comment 18 Mar 2025
The Fund had a decent 2024 in absolute terms, but a poor one relative to peers. The Fund returned 10.6% in rands, well ahead of inflation of 2.9%, but behind the peer group average of 12.8%1.

Overall, South Africa was a good place to invest in 2024. The FTSE/JSE All Share Index (ALSI) generated a return of 13.4%, while the FTSE/JSE All Bond Index returned 17.2%.
Those figures look less impressive on a global basis, with the MSCI World Index generating a return of 18.7% in US dollars and 20.6% in rands. Once again, the strong performance of global markets was overwhelmingly driven by US stocks, with the S&P 500 up 24.5% in US dollars and 28.5% in rands2.

This relative underperformance of the JSE masks how incredibly strong some individual names on the local bourse have been, in particular domestically focused stocks:

. The clothing retailers have seen substantial gains. Including dividends, Truworths returned 48%, Pepkor 51%, The Foschini Group 57%, and Mr Price an eye-popping 95%.
. The banks all saw double-digit returns, with the star performers being Nedbank (up 41%) and Capitec (up 58%).
. Other financial services also saw strong gains, with Momentum up 45%, Discovery up 38% and OUTsurance up 64%.
. Food producers AVI and Tiger Brands saw gains of 46% and 51%, respectively, while recently listed Premier Group was up over 100%.
. Even the beleaguered food retailers had a good year, with Spar up 24% and Pick n Pay up 55%. The latter was buoyed by the listing of subsidiary Boxer Retail in the final quarter.

It is the relative 'underperformance' of many of the multinationals listed on the JSE, and the major mining companies, that has dragged down the market’s overall performance.

With the benefit of hindsight, one might now say that it is clear that coming into 2024, with loadshedding still present and election uncertainty looming, sentiment on SA-focused stocks was overly negative, and any positive surprise would see a resurgence in sentiment and share prices.

With the formation of the government of national unity (GNU) and loadshedding now seemingly in the rearview mirror, that is what has transpired, but was it obvious at the start of 2024?

In our March 2024 commentary, we highlighted that 2024 had above-average political risk: In addition to the South African national elections, a record percentage of the world’s population headed to the polls. We cautioned that given the heightened uncertainty, we had not bet the portfolio on one or two scenarios prevailing.

Rather, we had deliberately constructed a diversified portfolio for a wide range of outcomes. Indeed, we have seen many changes in governments across the world and many surprises. Not least in South Africa, where the market has reacted extremely positively towards the election outcome and the formation of the GNU.

In this environment, we have underperformed. We have owned, and continue to own, a number of the companies noted above. However, in many instances, we have either not owned these shares, not owned them in enough quantity or, arguably, sold too soon. We have also been overweight a number of the underperforming multinationals.

It is not unusual for us to underperform a rising market. As valuation-driven investors, we anchor to our estimate of fair value, preferring to own undervalued and out-of-favour stocks, selling appreciating stocks as soon as they exceed our estimate of fair value. This often means we will sell a share well before it peaks.

Market sentiment is like a pendulum - it tends to swing from bouts of excessive pessimism to excessive optimism, with the long-term real value somewhere in the middle. At the start of 2024, for many domestic businesses, it did appear that the market was being overly pessimistic, and so we owned a number of these shares. However, as we end 2024 and begin 2025, it seems to us that sentiment is beginning to price excessive optimism into the forward-looking expectations for many domestic counters, and so we continue to reduce our exposure.

South Africa continues to be plagued by many structural challenges, not least of which is widespread municipal failure, chronic underinvestment in infrastructure and pervasive unemployment. The GNU has yet to be properly tested with the difficult decisions and inevitable trade-offs that lie ahead.

Our public debt continues to grow, currently debt-to-GDP sits at approximately 75%, and we continue to run a deficit, with debt service costs alone forecast to exceed 20% of government revenue in 2025. In a country with a population north of 62 million, less than 1.9 million people contribute more than 75% of personal income tax.

We are not overly negative about the long-term prospects for South Africa, but we are highlighting that domestic investments are not without risks. For many local investments, we now question whether these risks are being adequately discounted in the prices one pays.

During the quarter, we sold down Absa and The Foschini Group and added to our positions in AB InBev and BHP. Offshore, our sister company, Orbis, continues to find greater value outside of the US than within it.

We continue to have more than 35% of the Fund directly offshore and, on a look-through basis, more than 50% of the portfolio’s exposure remains outside South Africa.