Has its growth put a cap on its ability to outperform?

We know that Allan Gray Ltd as a business has certainly changed significantly over the years. Whereas initially, it predominantly managed pension assets, it is now a significant player in the retail investments sector and this is borne out by the huge increase in its staff complement and the size of assets under management. The question arising is whether Allan Gray Ltd, purely as the result of it size relative to the market, is arithmetically still able to outperform the market by any meaningful margin.

In this regard, it was interesting to learn that as far Allan Gray Ltd’s relative size and its ability to deploy its strategy across the equity universe is concerned, its equity holdings of R 163 bn, represented 3.6% of the JSE ALSI free float of R 4.5 trn in 2010 compared to 2.6% (R 32 bn) in 2002. So while its relative size has grown by around 38% over this 8 year period, it still holds only a very small portion of the JSE ALSI free float.

Will its portfolio structure imply continued underperformance?

We are aware that Allan Gray Ltd’s portfolio structure differs materially from that of the other local asset managers. Its effective local equity exposure is 40% compared to the average competitor’s 50%. Its total offshore exposure is 30% compared to the average competitor’s 22%. Within local equities, Allan Gray Ltd’s exposure is heavily tilted towards Sasol and gold mining with an exposure of 24% of equities compared to 10% of its average competitor, who holds the difference in other resources. In addition, Allan Gray Ltd’s top equity holdings are typically Rand hedge shares.

In this context, the investor’s view on our local currencies is key to concluding on Allan Gray Ltd’s portfolio structure and its ongoing relative performance. Amongst analysts there are two distinct prevailing views, the one being that the Rand is significantly overvalued and the other one taking an opposite position. You do not need to be an investment expert to appreciate the impact Allan Gray Ltd’s contrarian structure should have on performance at times of a strong Rand. If your view is that the Rand is likely to strengthen further, you are likely to experience more disappointment from Allan Gray Ltd.

What is Orbis doing to avoid continued disappointment of its investors?

On the offshore side Orbis has also disappointed its investors by its underperformance. The question that crossed our mind is whether Orbis is ‘close enough to the action’ in the far-east and whether its business model is flawed to that extent.

Interestingly Orbis recently announced its decision, that a number of its analysts will be relocated to the far-east. At the same time, it was pointed out however, that Asia ex Japan assets constitutes only  approximately 6% of Orbis' total assets under management. The move was done in order to enhance that particular team’s research capability. Orbis continues to follow the exact same philosophy and process that the firm has employed since inception in 1990.

Allan Gray Ltd and Orbis do not believe any deficiencies exist that would have caused recent  underperformance. It was pointed out that the investment philosophy shared by both firms is such that periods of short-term underperformance are inevitable and such periods have been encountered in the past throughout the history of both firms. They nevertheless do not believe such short term underperformance equates to an inability to deliver superior investment performance over time.

Are developments concerning the Windhoek office indicative of deeper lying problems?

We have seen a staff turnover in the Windhoek office just shy of 100% over the past 10 years, while it was rumoured that Allan Gray Ltd recently lost its GIPF mandate.

In this context it was pointed out to us that since opening in 1996, the Namibian office has delivered superior long-term investment performance to its clients. Allan Gray Ltd gauges this as its key measure of whether the Namibian office has been successful as a business or not, and maintains a high degree of conviction in its ability to continue to do so in future. It nevertheless seeks to implement changes in the manner in which its staffing is organised, but this is aimed at creating a significantly more vibrant work environment for its staff. Allan Gray Namibia had nine employees, three of whom have left over the past year, whilst the former managing director remains a non-executive director on the board, as well as a consultant to the business. Of the staff that has departed, two replacements were already put in place, whilst an additional two persons are in the process of being recruited. Most important to Allan Gray Ltd is that client servicing has been unaffected by these recent staff departures.

It was pointed out to us that even though Allan Gray Ltd recently lost N$ 1 bn of GIPF assets, it currently still manages some N$ 2 bn of GIPF assets. Allan Gray Ltd is not aware of any intention of the GIPF to leave as a client, and is not aware of the source of this rumour.

Will Allan Gray Ltd continue to be an owner managed business?

We know that Allan Gray himself, now being well in his 70s, and who must be credited with the historic achievements of this business, has withdrawn from the day-to-day activities of the local business since 1990. Being aware that Allan Gray already made over a substantial portion of his interest to the staff share trust and the Allan Gray Orbis Foundation, our concern is whether this already has or may eventually lead to a change in the business dynamics of this asset manager that has already or may eventually impact on its performance.

Without disclosing Allan's exact shareholding level, it was confirmed that Allan continues to be the controlling shareholder in the business, with the balance owned by current and former senior executives, the Allan Gray Orbis Foundation and the Staff Share Trust. It was also pointed out that since Allan's departure from active management of the firm in 1990, Allan Gray Ltd has had a number of generations of investment leadership in place, who have all delivered superior investment performance over time to clients and that this is expected to remain the case going forward.

It was indicated in the Orbis Presidents letter for 2009 that the Gray family was considering the dedication of the economic benefits from its ownership in Orbis to a philanthropic body known as the Orbis Founders Philanthropies, whilst voting control would vest in an independent body. Whilst there has been internal discussion about something similar occurring in regard to Allan Gray Ltd, the firm has made no public statements in regard to the latter, or what particular shape this could take. The reason for this is that any specifics discussed internally may take a different form once/if finalised and announced publicly.

It was suggested that Allan Gray Ltd would remain an owner managed business, were Allan to leave his shareholding to a philanthropic body. Current and former executives are meaningful shareholders in the company, and have been so ever since Allan relocated to London in 1990. Their economic fortunes and those of future leaders within the firm (as well as staff through the staff trust), shall remain strongly tied to whether the firm delivers on its long-term mandate or not.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. Retirement Fund Solutions Namibia (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of Retirement Fund Solutions.