Investing amid macro challenges - Allan Gray …...Global equity returns vs gross domestic product...
Transcript of Investing amid macro challenges - Allan Gray …...Global equity returns vs gross domestic product...
1Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Leonard Krüger
Investing amid macro challenges
2Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
• Dark clouds over SA
• Absolute and relative performance
• Valuation opportunities
• Diversified portfolio construction
3Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Investing amid macro challenges
Global
Slowing growthEurope & EM
BrexitHard / Soft
Trade warUS / China
Investing??
Falling global
interest rates
Geopolitics
Source Various / Allan Gray research
Mature bull marketSearch for yield
Business confidencePMI < 50
4Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Investing amid macro challenges
South Africa
Unemployment29%
Fiscal deficitJunk status
Popular
despondencyElections
Investing??
SOEs Eskom EAF
71%
Service
protests+40% YTD
Source Various / Allan Gray research
Consumer confidence Migration, housing-, car-,
retail sales
Business confidencePMI < 50
5Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
JSE Top 40
% Top 40 shares within 5% of 1 year low
RMB Morgan Stanley data (LK 31 July 2019)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
6Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Local shares are making multi-year lows
JSE Top 40 + Midcap Index = 105 Counters
RMB Morgan Stanley data (LK 31 July 2019)
ShopriteSappiCurro
RedefineSupergroup
NetcarePioneerRemgroLiberty
VodacomHyprop
SasolAspen
TruworthsWoolworths
MMILife Healthcare
MassmartRCL Foods
BraitIntu
HammersonNampak
0
5
10
15
20
25
30
35
40
45
50
3 year low 5 year low 7 year low 10 year low 15 year low
# o
f sh
are
s
7Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Market Returns
Allan Gray research (ARL 31 July 2019)
80
90
100
110
120
130
140
04/2018 06/2018 08/2018 10/2018 12/2018 02/2019 04/2019 06/2019
TOP4 Other 96
8Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Performance to 31 July 2019
Allan Gray research, data to 31 July 2019
- 10
- 5
0
5
10
15
20
1 year 3 years 5 years Since Inception
An
nu
alis
ed
retu
rns (
%)
Equity Fund (Inception: 01.10.98) Equity Fund BenchmarkBalanced Fund (Inception: 01.10.99) Balanced Fund BenchmarkStable Fund (Gross of Tax) (Inception: 01.07.00) Stable Fund Benchmark
9Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Relative drawdown Subsequent relative performance (%)
Peak TroughMonths
(peak-to-trough)
Peak-to-
trough decline 1-year 2-year 3-year
Average of first eight 14 (12.9) 17.6 22.3 29.3
Most recent
peak
Most recent
trough
Months
(peak-to-trough)
Peak-to-
trough decline
Jan 18 Jun 19 17 (17.9)
Orbis track record includes multiple periods of underperformanceLessons from the past
100
300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
30 Jun 2019 | *The asset-weighted net-of-fee return of all share classes in the Orbis Global Equity Strategy.
Orbis Global Equity Strategy’s cumulative weighted
net* relative performance vs FTSE World Index
10Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
SA Cash vs Equities
Allan Gray research (LK 31 July 2019)
141
129
121
110
90
100
110
120
130
140
150
Cash ALSI AGEF Average Manager
11Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
SA Cash vs Asset Allocation funds
Allan Gray research (LK 310719)
130
142
90
100
110
120
130
140
150
Cash AGBF AGSFSource: Allan Gray research (LK 31 July 2019)
12Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Real short-term interest rates vs. real returns in SA equities
INET BFA and Allan Gray research, data from 30 November 1970 – 30 June 2019 (SK040719q)
-30
-20
-10
0
10
20
30
40
-15 -10 -5 0 5 10 15
Su
bse
qu
en
t 4
-ye
ar
rea
l re
turn
AL
SI
Real short-term interest rates
15% of the time 15% of the time
47% of the time23% of the time
13Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Real equity returns are not correlated with GDP growth
Global equity returns vs gross domestic product (GDP) growth, 1970 - 2009
Elroy Dimson, Paul Marsh, and Mike Staunton, Global Investment Returns Yearbook 2010, Credit Suisse Research Institute, 2010.Triumph of the Optimists, Princeton
University Press, 2002.
14Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
2 000
4 000
8 000
16 000
32 000
64 0001
96
0
196
2
196
4
196
6
196
8
197
0
197
2
197
4
197
6
197
8
198
0
198
2
198
4
198
6
198
8
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
201
2
201
4
201
6
201
8
18 years 9 years
12 years
ALSI in real terms
IRESS and Allan Gray research, data to 31 July 2019 (SK020819m)
15Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
ALSI in real terms (Today vs 2008 experience)
IRESS and Allan Gray research, data to 31 July 2019 (SK020819m)
Feb 2015
30 000
60 000
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
Hell
Purgatory
16Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Finding ‘real’ opportunities on ALSI
Quant model 4-year Real Total Return prediction for SA equities
Feb 2015
5%
-15%
-10%
-5%
0%
5%
10%
15%
20%
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
Re
al re
turn
per
ann
um
pre
dic
ted
Source: Allan Gray Real EPS Quant model output, data to 31 Aug 2019 (RS290819)
17Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Asset allocation as at 31 July 2019
Allan Gray Balanced Fund
% of Portfolio
Asset Class Total LocalForeign Incl.
Africa
Net Equity 63.1 43.6 19.5
Hedged Equity 7.8 1.9 6.0
Property 1.5 1.3 0.2
Commodity-linked 4.0 3.2 0.8
Bonds 14.3 10.0 4.4
Money Market and Cash 9.3 7.4 1.9
Total 100.0 67.4 32.7
Note: There may be slight discrepancies in the totals due to rounding.
% of Portfolio
Total LocalForeign Incl.
Africa
35.0 20.8 14.2
7.5 2.1 5.4
4.0 3.8 0.2
2.7 1.7 1.0
28.8 19.2 9.6
22.0 17.9 4.1
100.0 65.5 34.6
Allan Gray Stable Fund
18Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Top 10 Equity positions
Allan Gray Balanced Fund Orbis Global Equity Fund
Allan Gray Balanced Fund % of Fund
Naspers (*) 7.0
British American Tobacco 5.1
Glencore 3.0
Sasol 2.9
Remgro 2.7
Standard Bank 2.3
Investec 2.2
Woolworths 1.8
Old Mutual 1.7
Life Healthcare 1.4
Total 30.0
Stocks % of Orbis Funds
NetEase 8.0
XPO Logistics 5.7
Naspers 5.5
AbbVie 4.3
Sberbank of Russia 3.9
British American Tobacco 3.5
Celgene 3.4
Autohome 3.1
Facebook 2.8
Sumitomo 2.8
Total 43.0Note: (*) Including Naspers Stub certificate.
19Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Diversified portfolios for a wide range of potential outcomes
Allan Gray Balanced Fund
Real assets exposure – 70% of fundRand hedge – 64% of fund
“Failed state” – 36% of fund Foreign currency exposure – 60% of fund
SA equities; 28%
Foreign cash / bonds; 12%
Foreign equities; 20%
Commodities; 4%
US Dollar; 28%
GBP; 4%
Euro; 8%
Yen; 2%
Other; 17%
Source: Allan Gray Research (LK31082019)
SA Government; 4%
SOE; 1%
Banks; 16%
SA Inc; 15%
South Africa; 45%
Commodities; 5%
Foreign Equity; 20%
20Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Investing amid macro uncertainty
Absolute performance tough and relative performance disappointing
Stay the course, valuation trumps macros
Allan Gray and Orbis not panicking, resolve unchanged
Building diversified portfolios, resilient under different outcome
Conclusion
21Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Thank You
22Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Appendices
23Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Absolute Attribution – 12 months to 31 July 2019
Allan Gray Balanced Fund
Contributors % p.a. Detractors % p.a.
1 Naspers 2.0 1 Sasol -3.8
2 Impala Platinum 1.8 2 British American Tobacco -2.2
3 MultiChoice Group 0.5 3 Glencore -0.9
4 Woolworths 0.5 4 Remgro -0.8
5 Gold Fields 0.4 5 Sappi -0.7
6 BHP Group 0.3 6 Netcare -0.6
7 Fortress REIT 0.3 7 KAP Industrial -0.5
8 Zambezi Platinum (RF) 0.2 8 Aspen Pharmacare -0.4
9 Royal Bafokeng Platinum 0.2 9 Brait SE -0.4
10 Capitec Bank 0.2 10 Tongaat Hulett -0.4
Other Contributors 1.3 Other Detractors -3.5
Total Contributors 7.6 Total Detractors -14.3
Total Performance -6.7
# Returns are shown for the share carveout
There may be slight discrepancies in the totals due to rounding
StatPro Performance and Attribution systems are used to perform the attribution
24Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Relative Attribution – 12 months to 31 July 2019
Allan Gray Balanced Fund vs ALSI
Contributors % p.a. Detractors % p.a.
1 Impala Platinum O 1.3 1 British American Tobacco O -2.0
2 Shoprite U 0.4 2 Sasol O -2.0
3 Aspen Pharmacare U 0.4 3 BHP U -1.6
4 Woolworths O 0.3 4 Glencore O -1.2
5 MultiChoice O 0.3 5 Anglo American U -0.8
6 Intu Properties U 0.3 6 Anglogold Ashanti U -0.7
7 Firstrand U 0.2 7 Remgro O -0.7
8 Mondi U 0.2 8 KAP Industrial O -0.5
9 Zambezi Platinum (RF) O 0.2 9 Sappi O -0.5
10 Mr Price U 0.2 10 Netcare O -0.4
Other Contributors 3.5 Other Detractors -5.8
Total Contributors 7.3 Total Detractors -16.2
Total Relative Performance -8.9
# Returns are shown for the share carveout
There may be slight discrepancies in the totals due to rounding
StatPro Performance and Attribution systems are used to perform the attribution
25Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Relative Attribution – 12 months to 31 July 2019
Allan Gray Stable Fund vs ALSI
Contributors % p.a. Detractors % p.a.
1 Fortress REIT O 1.1 1 BHP U -1.9
2 Impala Platinum O 0.9 2 Glencore O -1.7
3 Pioneer Food U 0.4 3 Brait SE O -1.6
4 Shoprite Holdings U 0.4 4 Sappi O -1.3
5 Old Mutual O 0.4 5 Aspen Pharmacare O -1.2
6 Zambezi Platinum (RF) O 0.4 6 Naspers U -1.0
7 MultiChoice O 0.4 7 Sasol O -1.0
8 Woolworths O 0.4 8 Capital & Regional O -0.9
9 Aveng O 0.3 9 Anglo American U -0.9
10 Royal Bafokeng Platinum O 0.3 10 Anglogold Ashanti U -0.8
Other Contributors 5.5 Other Detractors -6.9
Total Contributors 10.4 Total Detractors -19.1
Total Relative Performance -8.6
# Returns are shown for the share carveout
There may be slight discrepancies in the totals due to rounding
StatPro Performance and Attribution systems are used to perform the attribution
26Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Absolute Attribution – 12 months to 31 July 2019
Allan Gray Equity Fund
Contributors % p.a. Detractors % p.a.
1 Impala Platinum 1.9 1 Sasol -4.0
2 Naspers 1.5 2 British American Tobacco -2.0
3 Woolworths 0.5 3 Glencore -0.9
4 BHP 0.4 4 Remgro -0.8
5 MultiChoice 0.4 5 Netcare -0.7
6 Gold Fields 0.4 6 KAP Industrial -0.7
7 Capitec Bank 0.3 7 Sappi -0.7
8 Fortress REIT 0.2 8 Nampak -0.4
9 African Rainbow Minerals 0.2 9 Aspen Pharmacare -0.4
10 Pan African Resources 0.2 10 Investec -0.4
Other Contributors 1.6 Other Detractors -4.0
Total Contributors 7.6 Total Detractors -15.0
Total Performance -7.4
# Returns are shown for the share carveout
There may be slight discrepancies in the totals due to rounding
StatPro Performance and Attribution systems are used to perform the attribution
27Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Naspers – Discount over time
R 0
R 1 000
R 2 000
R 3 000
R 4 000
R 5 000
R 6 000
R 7 000
Tencent Value per Naspers Share Value of Rump Naspers Share Price
28Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Sasol: LCCP
Sasol company reports, Allan Gray estimates
0
200
400
600
800
1000
1200
1400
-
2 000
4 000
6 000
8 000
10 000
12 000
14 000
Original Aug 2016revision
Feb 2019revision
May 2019revision
OriginalFY2022
May 2019revision
EB
ITD
A (
$ m
illio
ns)
Ca
pita
l in
ve
stm
en
t ($
mill
ion
s)
29Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
British American Tobacco vs Richemont
Allan Gray research, company reports (DA 25 July 2019 NS)
Per share data BAT RICHEMONT
Share price £29 €74
Three-year rand capital return -45% 41%
Three-year rand earnings 23% -17%
PE (x) 9.8 25.8
DY (%) 7.0 2.4
EV / EBITDA (x) 9.4 14.3
Operating margin (%) 42 16
Net debt / (cash) 19.7 -4.5
% share price 67 -6
NGP of sales / Online of sales 4% 16%
NGP of earnings / Online of earnings -4% -6%
30Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Iron ore: BHP earnings sensitivity
Allan Gray research
Iron ore $115/t $55/t
31Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
-24%
89%
215%
$0
$2
$4
$6
$8
$10
$12
Market price 10x trough cashflow 12x normal cashflow 15x peak cashflow
Glencore, limited downside, attractive upside
Allan Gray research, Company results
32Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Old Mutual Valuation
Allan Gray research, Company results
Rand per share
Operations R 1.28 eps x 10 PE 12.80
Nedbank 4.93
NAV 8.52
Total 26.26
Total if NAV Discount of 30% 23.70
Upside 23%
Market Price 19.20
33Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Old Mutual South Africa, EBIT
Allan Gray research, Company results
0,00
0,50
1,00
1,50
2,00
2,50
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18
Ran
d P
er
sh
are
(E
BIT
)
Normal
34Allan Gray Proprietary Limited is an authorised financial services provider. © Allan Gray 2019
Source:
Voter despondency in general elections
Service delivery protests YTD +40%
Unemployment at record level of 29%
Eskom productivity indicators at all time lows (EAF =71%)
98% of houses are sold below asking price
Luxury car sales -18% yoy
30% of food sales on promotion
Local cement producer volumes -10-15%
It’s brutal out there!
Various sources, Allan Gray research (LK 31 July 2019)