Who should invest in this unit trust?
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. The Fund’s returns are likely to fluctuate significantly over the short to medium term, but this should not concern long-term investors. Investors should also be comfortable with price volatility.
Lowdown on the investment philosophy
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.
We do not consider the benchmark, which means our 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.
What can you expect in terms of volatility?
Investors should expect the unit trust’s price to fluctuate significantly over the short to medium term. One of the most commonly applied definitions to risk in investing is that of equating risk to volatility. At Allan Gray, we define risk as the probability of a permanent loss of capital. 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.
Overview of the current investing environment
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 basically unchanged over the past three years, as earnings have generally undershot expectations.
However, for the first time in many years, we are beginning to find opportunities in certain domestic consumer businesses outside financial services. Globally, one of the few sectors that looks reasonably valued is the resources sector and we have started to invest in certain mining companies. The risk in this sector is that Chinese demand plateaus or declines. Fortunately, the underlying commodity prices are in many cases not particularly high and the company valuations are pricing in further commodity price declines.