When Allan Gray launched its equity unit trust 10 years ago, it was barely known to the public. Its portfolio managers had never been interviewed, even though the firm had been around for 24 years. So there were not many people, apart from Allan Gray staff, who got on the bus at the start of an exceptionally strong ride: R1 000 invested on October 1 1998 would be worth R17 140 now. The same investment in the all share index would be worth R6 280.
Hilton Davies, the first head of Allan Gray Unit Trusts said keeping a low profile was fine "when our clients were top executives, who dominated trustee boards". But as legislation brought in member trustees, he realised in order to get well known among them, "we either had to spend a fortune on advertising or launch a unit trust with a publicly available track record".
Allan Gray's current chief investment officer Ian Liddle says though the composition of the fund has changed substantially over the years, its investment philosophy hasn't. It's a now-familiar approach (though it wasn't in 1998), made famous by US investor Warren Buffett: buy a company when its market value is less than a businessman would pay to buy it.
But Liddle dislikes the "value manager" tag consultants like to give the firm. Any sensible fund manager is looking for value and growth from their shares, he says. "They cannot be split apart."
Rather than the meaningless "value" style, Allan Gray has a contrarian approach which says strong market fads, such as the 1998- 2000 IT bubble, can lead to severe underperformance later.
Davies believes the equity fund might not have been launched if it had not been for the firm's underperformance in 1997, when it invested heavily in resource shares which went nowhere and avoided high-flying financial services and IT sectors. As it is, the fund could not have asked for a better time to launch: it was just after the August 1998 crash. There are strong parallels with today - the JSE had fallen 40% and there was panic after a global crisis in emerging markets.
Then, as now, there were plenty of shares to buy. Says founding portfolio manager Simon Marais. "In those days you could buy De Beers for less than the value of its holding in Anglo American - which itself was absurdly undervalued."
Value was being unlocked as empires with interlocking holdings and pyramids such as Anglovaal were unwinding.
The area in which there was, with hindsight, absolutely no value was technology. In those days the "New Economy" was the buzzword and Allan Gray stood out as a sceptic. Datatec was worth more than the entire retail sector, a fact that did not worry most other fund managers. Marais only bought shares in Datatec (and in Didata) much later, when it was a fallen angel in 2001.
Most of the fund's outperformance of the index (known as alpha) happened early on. In the five years to October 2003, the equity fund returned 40,2%/year, a huge 24,9 percentage points ahead of the market. Since then, it has just kept pace, with a 25,9% annualised return compared with 25,2% from the all share.
Liddle says it is hard to outperform the market in a strong bull run as there is a broad advance in all sectors, with few opportunities for stockpicking. Allan Gray comes into its own during bear markets or when there is a big disparity in the valuation of sectors. For example, credit retailers were severely undervalued in 2001/2002 and Allan Gray invested heavily, particularly in Edgars.
Its top holdings now include shares which are popular with the other asset managers such as MTN, Standard Bank and Remgro. Liddle says these happen to be the shares which Allan Gray believes show potential. However, gold shares and SABMiller are both unpopular with the typical SA fund managers but Allan Gray has strong holdings in both.
Liddle says Allan Gray can still generate alpha in spite of size with its one-year return of negative 11,3%, 6,7% ahead of the all share index.
Allan Gray Equity is now, by some margin, the largest equity fund in SA. This can in part be attributed to far more professional marketing which transformed Allan Gray from a rather insular investment boutique into the most effective asset-gathering machine in the collective investment industry.
As Davies realised early on, if you have a strong brand, investors are more likely to tolerate bursts of underperformance. Financial advisers also have to spend less time explaining why they invested with Allan Gray.
