September, 2023
Past performance is not indicative of future performance. Returns shown are net of fees and assume reinvestment of distributions. Returns are annualised for periods of one year and over. Annualised returns show the average amount earned on an investment in the relevant Class each year over the given time period. Actual investor performance may differ as a result of the investment date, the date of reinvestment of income distributions, and withholding tax applied to income distributions.
The highest and lowest returns earned during any calendar year since the launch of each Class are shown to demonstrate the variability of returns. The complete return history for each Class can be obtained by contacting our Client Services team.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/LatestQuaterlyCommentary-2.pdfJune, 2023
It is unclear if we are on the cusp of a deep or protracted cyclical downturn. What is clearer though, is that if a recession is imminent, it is likely to be one of the world’s most telegraphed recessions yet. Share markets are forward looking so we consider that these expectations have already been factored into share prices, at least to some degree.
Over recent months, equity investors have gravitated to the perceived safety of large companies at the expense of ‘riskier’ smaller companies. Graph 1 illustrates this. It plots the performance of the S&P/ASX 100 Index (the largest 100 companies listed in Australia) and the S&P/ASX Small Ordinaries Index (the next 200 largest companies listed in Australia). The Small Ordinaries Index is now at its lowest point relative to the ASX 100 Index since April 2000 when the Small Ordinaries Index first launched.
While the Allan Gray Australia Equity strategy does own some large companies, it has a significant skew towards medium-sized and smaller companies (see Table 1). It is here that we think the greatest upside potential exists. Lendlease is one such mediumsized company. If it’s true that good investments often begin with an element of discomfort, then Lendlease would fit the bill.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/LatestQuaterlyCommentary-1.pdfMarch, 2023
The Australian share market rose during the March quarter, albeit with some fluctuation, with the S&P/ASX 300 Accumulation Index finishing up 3.3%. Strong gains in January gave way to a weaker finish, as the index fell in both February and March. The Allan Gray Australia Equity Fund (Class A) was up 2.0% this quarter, underperforming the benchmark. It is worth noting that most of the underperformance came in the rising market of January. The Fund actually outperformed the benchmark from the end of January to the end of March, as shown in Graph 1.
Financials stocks were overall neutral for relative returns for the Fund for the quarter. Financials was the market’s weakest performing sector, so the Fund’s underweight position was beneficial. Looking at individual stocks, Virgin Money UK was the largest detractor for the Fund for the quarter. This came during a period of negative news and sentiment toward specific overseas financial companies.
Virgin Money trades at around 33% of net tangible assets, despite making high single digit returns on tangible equity. It is also well-capitalised. We believe Virgin is priced more moderately compared to other Australian-listed banks. We maintain the position and added to it on recent weakness.
Other Financials holdings include AMP, Westpac and ANZ, which were detractors for the quarter, and QBE which was a strong positive contributor for the quarter. The Fund added a new insurance company holding during the quarter in Insurance Australia Group (IAG). Potential risks for IAG include reliance on reinsurers, possible claims growth and cyclicality of commercial business. We believe the price reflects investor uncertainty, allowing investment at a reasonable valuation.
Lastly in Financials, Challenger was a detractor for the quarter. However, it has been a strong positive contributor to relative performance over the last one, three and five years, and as such we had significantly reduced the position on share price strength over that time, in late-2022 and early-2023. Consequently, the residual position is a relatively smaller weight in the Fund today.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/QuarterlyCommentary-6.pdfDecember, 2022
The Australian share market rose strongly during the December quarter, with the S&P/ASX 300 Accumulation Index up 9.1%. The quarterly number masks the fact that gains earlier in the quarter gave way to a weaker finish (the S&P/ASX 300 Accumulation Index was down 3.3% for the month of December). The Allan Gray Australia Equity Fund (Class A) was up 13.8% this quarter, outperforming the benchmark.
Graph 4 shows the Equity Fund’s performance over one month, three months and 12 months versus the benchmark. If you invest in the same shares as the majority of investors at the same time, it is by definition almost impossible to outperform the market. As the following graphs demonstrate, the Equity Fund maintains a very different position to the index weightings, and with good reason. Unfortunately, being positioned differently does not guarantee outperformance – only ‘different’ performance. Our conviction is based upon our fundamental research and today we believe extreme differences in valuation remain across the share market between shares that we assess as undervalued, and those that we assessed as overvalued.
Our approach is to position the Equity Fund in the most undervalued shares versus our assessment of long-term value. We believe this not only maximises the opportunity for long-term outperformance, but also best mitigates the risk of permanent loss of capital, which stems from overpaying.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/LatestQuaterlyCommentary.pdfSeptember, 2022
Past performance is not necessarily an indicator of future performance.
The benchmark is the S&P/ASX 300 Accumulation Index. All performance returns shown are net of fees and assume reinvestment of distributions. Returns are annualised for periods of one year and over. Annualised returns show the average amount earned on an investment in the Class each year over the given period. Actual investor performance may differ as a result of the investment date, the date of reinvestment of income distributions, and withholding tax applied to income distributions.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/Allan-Gray-Australia-Equity-Fund-Fact-Sheet_Class-B_September-2022.pdfJune, 2022
The Australian share market fell during the June quarter, with the S&P/ASX 300 Accumulation Index down 12.2%. The Allan Gray Australia Equity Fund Class A was also down this quarter, by 12.7%, moderately underperforming the benchmark.
During the quarter, positioning in the Energy sector was the largest positive contributor, followed by some share-specific holdings in the Financials sector. Woodside Energy Group, Worley and Santos were leading contributors within the Energy sector. Origin Energy also contributed positively, though it is officially categorised within the Utilities sector.
Within the Financials sector, QBE Insurance Group, Challenger and AMP all contributed positively to relative returns. Challenger and AMP in particular outperformed the broader Financials sector.
Despite recent performance, we believe many of these names remain attractive versus the broader market, and so retain meaningful positions within the Fund. We have, however, trimmed all these positions other than AMP.
Positive contribution by the above-mentioned names was offset primarily by underperformance within our selected Materials holdings. In particular, the main detractors included Sims, Alumina and Newcrest Mining. We still see significant value in these companies for the Fund and added to positions in Alumina and Sims during the quarter.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/QuarterlyCommentary-3.pdfMarch, 2022
The Australian sharemarket rose during the March quarter, with the S&P/ASX 300 Accumulation Index returning 2.1%. The Allan Gray Australia Equity Fund outperformed strongly, returning 13.7% during the same period, outperforming its S&P/ASX 300 Accumulation Index benchmark by 11.6%. It was a particularly strong quarter for the Equity Fund, during a particularly volatile period for the market, demonstrating the diversification benefits of a contrarian investment approach.
During the quarter, positioning in the Energy sector was the largest positive contributor, followed by some stock-specific holdings in the Materials sector. Within these, Woodside, Santos, Sims, Incitec Pivot, Nufarm, Alumina and South32 were leading contributors. Origin Energy also contributed strongly, although it is officially categorised within the Utilities sector.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/QuarterlyCommentary-2.pdfDecember, 2021
The Australian sharemarket had a positive quarter to 31 December, with the S&P/ASX 300 Accumulation Index up 2.2%. The Allan Gray Australia Equity Fund (Class A) returned 0.9% during the same period, underperforming its S&P/ASX 300 Accumulation Index benchmark by 1.3%.
On a monthly basis, the Fund outperformed its benchmark in October, with all of the quarterly underperformance coming in November. In December the Fund recouped some of this as it moved back into strong outperformance for the last month of the year.
During the quarter, positioning in the Energy sector was the largest detractor, followed by some share-specific holdings in the Materials sector. Within those, Alumina, Woodside Petroleum and Oil Search were leading detractors. It was far from one-way traffic however, as positive contribution to relative performance came from Sims, Incitec Pivot, Newcrest Mining, South32, and Worley.
Within the Energy sector, we believe significant undervaluation remains, so we continue to hold meaningful positions here. We also added further to engineering services company, Worley, during the quarter. The shares held in Oil Search were exchanged into Santos shares in December, following the previously announced merger. The Financials sector was mixed, with outperformance from NAB partially offsetting underperformance from Westpac.
Within Financials, the banks have performed strongly over the last year and we lightened exposure a little further during the quarter. However, the reduction in exposure came from the strongly outperforming NAB and we shifted some of this into Westpac on relative weakness.
Elsewhere, strong positive contribution to relative performance came from Metcash in the Consumer Staples sector and we reduced this position meaningfully at higher prices. The absence of exposure to Information Technology and Healthcare both also aided relative performance, as those sectors underperformed.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/QuarterlyCommentary-1.pdfSeptember, 2021
The Australian sharemarket had a positive quarter to September, with the S&P/ASX 300 Accumulation Index up 1.8%. The Allan Gray Australia Equity Fund returned 5.5% during the same period, outperforming its benchmark by 3.7%. On a monthly basis, the S&P/ASX 300 Accumulation Index fell 1.9% in September.
This was the first negative calendar month performance for the broad market in 12 months! In contrast, the Fund rose in this falling market. Undervaluation can be a powerful force as recognition spreads and imbalances are uncovered.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/QuarterlyCommentary.pdfDecember, 2020
The Australian sharemarket had a strong quarter with the ASX 300 Accumulation Index up 13.8%. The Allan Gray Australia Equity Fund - Class A returned 23.1% during this period, outperforming its benchmark by 9.3%.
In a reversal from the prior quarter, our overweight position in the Energy sector was the largest positive contributor to relative returns. This includes stocks such as Woodside Petroleum and Oil Search. The Materials sector was also positive overall, with Alumina and Sims contributing strongly to relative performance, which more than offset underperformance from Newcrest Mining. We continue to view the abovementioned companies as sustainable businesses with strong balance sheets that offer particularly attractive value relative to the market.
Elsewhere, the Fund’s underweight position in Healthcare contributed strongly to relative performance as that sector fared poorly during the quarter. We have long held the view that some of the stocks in this sector have been priced with excessively optimistic expectations, and remain wary of the risk of overvaluation.
On the negative side, the underweight exposure to Information Technology was the largest detractor on a sector basis. However, the detraction was not particularly substantial versus the overall portfolio, which featured a high proportion of outperformers for the quarter.
We continue to see great opportunity in discounting the obvious, and investing where others are not looking. These opportunities are among longer-standing companies that have a proven track record, and a sound basis to exist, but which for some reason have appeared 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, and similar past experiences. We see significant unrealised value in the Fund versus the market, and thus remain optimistic about future long-term prospects.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/Allan-Gray-Australia-Quarterly-Commentary_December-2020.pdfSeptember, 2020
The Australian sharemarket rose in July and August, but was notably weaker in September, giving back the earlier gains. The Fund’s benchmark, the S&P/ASX 300 Accumulation Index, was down 0.1% for the quarter. The Allan Gray Australia Equity Fund (Class A) underperformed its benchmark by 4.6% during the period.
In a reversal from the prior quarter, our overweight position in the Energy sector was the largest detractor from returns. This includes stocks such as Woodside Petroleum and Oil Search. Performance from the Materials sector was also negative overall, with Alumina and Sims detracting from relative performance. We continue to view companies such as these as offering particularly attractive value relative to the market, strong balance sheets and sustainable businesses.
Elsewhere, exposure to Financials was negative for relative performance, with the sector generally weaker than the market during the quarter, including holdings such as National Australia Bank and AMP.
The strongest positive contributor to returns during the quarter was residential land developer Peet. Also amongst the top positive contributors were stocks within the otherwise unloved Energy and Materials sectors – Worley and Incitec Pivot.
While the shorter-term underperformance is challenging, we firmly believe that now it is as important as ever to remain focused on valuation discipline. History shows that getting drawn into popular trends for short-term comfort is more likely to result in overpaying and long-term disappointment. As such, we continue to avoid areas we see as particularly overvalued (for example many of the staples, utilities, healthcare and technology names). Instead, we continue to hold positions in companies that are less favoured by the consensus, but that we believe have sustainable business models and that offer great value in a distorted market.
File:June, 2020
The Australian sharemarket rebounded strongly in the June quarter, with the S&P/ASX 300 Accumulation Index gaining 16.8%. The Allan Gray Australia Equity Fund (Class A) outperformed its S&P/ASX 300 Index benchmark by 1.5% during the quarter.
The June quarter saw some reversal in trends that have been a headwind to our portfolio previously. Notably, strength in the Energy sector made our overweight position in Energy a strong positive for relative performance. Within that sector, Oil Search Limited was the largest contributor at the stock level.
The quarter also saw weaker relative performance for the Healthcare sector. Consequently, the absence of Healthcare exposure in the Fund was another significant positive. Exposure to Financials was positive overall for relative performance, with a meaningful position in AMP Limited being the largest positive driver at a stock level within the Financials sector.
The worst performing sector for the Fund was Consumer Staples, due to the holding in Metcash Limited. We had reduced exposure to this stock on the extreme strength of the first quarter and we remain comfortable with the current holding.
Performance from the Materials sector was negative overall, with Nufarm Limited, Incitec Pivot Limited and Alumina Limited all detracting from relative performance. But it was not entirely one-sided. Our largest holding in the sector, Newcrest Mining Limited, was also the largest positive contributor of all stocks held in the portfolio.
Cyclically-exposed sectors and companies remain key positions in the Fund currently. Notwithstanding some bright spots this quarter, it is our opinion that they still offer significantly greater value and price upside than the more stable earners (staples, utilities, healthcare) and disruptors (technology companies) which appear to trade at blue-sky valuations. Our portfolio remains firmly skewed away from healthcare, staples and technology, having used recent strength to sell almost entirely the positions we had in those sectors (such as Coles and Telstra) and invest the proceeds in a number of, in our opinion, very cheap but cyclically-exposed companies currently experiencing earnings headwinds.
File:ticker: ETL0060AU
commentary_block: Array
factsheet_url:
QUARTERLY COMMENTARY
https://www.allangray.com.au/b/publications-library/#pg-128-2
QUARTERLY COMMENTARY!
release_schedule: Quarterly
fund_features:
Allan Gray Australia Equity Fund’s investment approach is to buy securities that offer long-term value, that are currently unpopular with the general investment community or are not well known. Allan Gray will not buy a security simply because it is in the Benchmark. Similarly, Allan Gray will buy significant positions in securities that are not in the Benchmark if they offer outstanding value, based on our bottom-up, fundamental valuation of the opportunity.
- Returns from the Fund can be volatile, particularly over the short and medium term.
- In implementing the Fund’s strategy, Allan Gray adheres to detailed investment restrictions and limits, as set out in the Fund’s Product Disclosure Statement and accompanying Information Booklet (together, the PDS).
- The Fund offers you a choice of two structures : Class A which charges a base fee and a performance fee, or you can choose to pay a zero base fee and higher performance fee with Class B.
manager_contact_details: Array
asset_class: Domestic Equity
asset_category: Australia Large Value
peer_benchmark: Domestic Equity - Large Value Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund