Quarterly Review – March 2021
In this extract from our March 2021 Quarterly Commentary, Julian Morrison, CFA, our Head of Research Relationships and National Key Accounts, reviews the performance of the Allan Gray Australia Funds. Click here to read the full Quarterly Commentary.
Allan Gray Australia Equity Fund
The Australian sharemarket had a decent quarter, with the S&P/ ASX 300 Accumulation Index up 4.2%. The Allan Gray Australia Equity Fund (Class A) returned 7.6% during the same period, outperforming its S&P/ASX 300 benchmark by 3.4%.
In a continuation from the prior quarter, the Fund’s overweight position in the Materials sector was the largest positive contributor to relative returns from a sector perspective. But this exposure has been very different from the benchmark, with the most positively contributing holdings including Incitec Pivot, Nufarm and Sims.
Energy companies such as Woodside Petroleum and Oil Search have remained appealing and the Fund continues to hold these shares today.
Elsewhere, the Fund’s underweight position in Healthcare and Information Technology contributed strongly to relative performance, as those sectors fared poorly during the quarter. We have long held the view that some of the stocks in these sectors have been priced with excessively optimistic expectations, and remain wary of the risk of overvaluation.
We continue to see great opportunity in discounting the obvious and investing in areas that have been overlooked or discarded by other investors. These opportunities are currently among longer-standing companies that have a proven track record and a sound basis to exist, but which for some reason are unappealing to most investors. Despite the strong performance in the last quarter, the recovery to date has been relatively immaterial in the context of the preceding underperformance by the Fund and similar past experiences. We see significant latent unrealised value in the Fund versus the market and thus remain cautiously optimistic regarding future long-term prospects.
Allan Gray Australia Balanced Fund
The Allan Gray Australia Balanced Fund outperformed its composite benchmark by 4.0% for the March quarter.
The Fund had 68% in shares at quarter end, although about 7% of the global share exposure is reduced through the use of exchange-traded derivatives, which allows for some protection in those periods where market indices fall. Stock selection in both Australian and global shares added to relative returns.
The Fund held around 21% in fixed income securities and a 5% exposure to gold through an exchange-traded fund at quarter end. The fixed income allocation has remained significantly shorter in duration than the benchmark – at below one year versus around eight for the benchmark. This contributed to outperformance for the March quarter, with government bond yields generally rising during this period. The fixed income portion of the Fund remains more defensively positioned than the benchmark in terms of both relative and absolute returns, in the event interest rates rise further. As with the Equity Fund, we believe potential portfolio value relative to the market is significant and we continue to manage for risk with a long-term, valuation-driven perspective.
Allan Gray Australia Stable Fund
The Allan Gray Australia Stable Fund outperformed its cash rate benchmark by 2.0% for the March quarter.
The performance of the Stable Fund is driven by the performance of our favoured Australian share holdings and the decision on how much is invested in shares versus cash. Having added to share exposure during the weakness of the prior quarter, the Fund took advantage of the strength of the March quarter to lighten some of our stronger positions.
As at the end of March, the Fund had around 35% invested in ASX-listed securities, with the remainder in cash and money market investments. This can be seen in the graph below, which shows our allocation between cash and shares over time.
The overall recovery in the sharemarket during the last quarter fails to highlight the significant divergence that has built up over time between different categories of stocks. Some popular stocks and sectors are priced at levels that in our view are far too optimistic. We therefore remain focused on avoiding those areas and the risks that come with excessive valuation. Instead, the shares held in the Fund will be those we have assessed as most attractively priced and where risk of permanent capital loss is low.
Stable Fund share weighting – share allocation rises where we see value in shares
Source: Allan Gray, Bloomberg, as at 31 March 2021.
Julian Morrison holds a Bachelor of Arts (Honours – University of Sheffield) and the Chartered Financial Analyst designation.