Portfolio manager Tim Acker discusses the performance and positioning of the Allan Gray Equity Fund during the first quarter.
2024 was a very strong year for local equities, and this positive momentum carried through into the first quarter of 2025. The FTSE/JSE All Share Index generated a return of 13% for the 2024 calendar year and 6% for the latest quarter. Global equity markets also performed well in 2024, although they started 2025 on a weaker note. The MSCI World Index finished up 19% in US dollars in 2024 but retracted 2% in the first quarter of 2025.
The Allan Gray Equity Fund returned 4% for the quarter, outperforming its benchmark by 2%. Performance was driven by some of the larger multinational “rand-hedge” shares, such as AB InBev and British American Tobacco. This is a reversal of one of the dominant trends of 2024: Following the national elections and the formation of the government of national unity (GNU) in June 2024, domestically focused “SA Inc” shares strongly outperformed rand-hedge shares. In response, the Equity Fund reduced its exposure to SA Inc names in the second half of 2024 and increased holdings in rand hedges like AB InBev. Favouring rand-hedge shares detracted from performance last year but has supported performance in the most recent quarter.
The formation of the GNU sparked a wave of optimism about South Africa’s future, both locally and abroad. Some of this was driven by hopes of political reform and economic recovery, but it also reflected relative appeal – many emerging markets were in deeper turmoil, making South Africa look comparatively stable. While we acknowledge encouraging signs, such as improvements at Eskom, our research suggests that broader progress has been limited. State-owned enterprises continue to face deep structural issues, and the business environment remains difficult. Recent financial results from consumer-focused companies reinforce this view – many continue to report subdued earnings as household spending continues to come under pressure.
This illustrates the danger of paying a premium for optimism. When expectations shift quickly, share prices can get ahead of underlying fundamentals. Our approach, as always, is bottom-up focused, favouring companies priced well below their intrinsic value, across sectors and regions. There are certainly still areas of value among SA Inc stocks, but some valuations are too high and do not reflect the economic and political risks. The recent difficulty around passing a coalition budget and ongoing public tension between the South African government and the United States are good reminders of these risks. There is value in having a diversified portfolio containing both SA Inc and rand-hedge stocks. Fortunately, there are attractively priced shares available in both categories.
Stock selection in the offshore portion of the portfolio contributed to relative performance in the quarter. We remain underweight the US market and mega-cap tech – areas that have driven global market returns for several years but now appear increasingly crowded and expensive. There have been early signs of this trend shifting. For instance, European equities, which have long been out of favour, have recently begun to attract renewed interest. Emerging markets, too, outperformed the MSCI World Index this quarter. Japan, often overlooked in global portfolios, offers compelling opportunities for uncorrelated returns in a concentrated global market. The offshore portion of the Equity Fund continues to look very different from the world index and many of our competitors, something we believe will benefit long-term returns.
