Fund Name: Allan Gray Optimal Fund Portfolio Manager: Ruan Stander
Investonline Views
We like this fund and like its concept, as Allan Gray is implementing their well researched ideas with minimal overall stock market exposure. The fund is fairly low risk and should provide a 3% to 4% return above money market with virtually no taxable income. i.e. a far higher after tax return than taxable interest earned in money market.
The fund has done abnormally well over the last seven months, up 12.3% (annualised 21.1%) versus a fairly consistent return of 8.5% per annum over the last 14 years. Its mandate is not to produce such exceptional returns, and therefore we feel the fund may be de-risked over the next six months resulting in far more modest returns in the short-term.
Long-term we recommended this fund forms a core holding of 25% in a conservative to moderately conservative investment portfolio.
Allan Gray Optimal Fund Description
The fund is a unique unit trust that operates similarly to a hedge fund. The fund’s performance is a function of the best equity researched ideas from the Allan Gray team. Shares are selected relative to the stock market index that should out or under perform. It then uses derivatives to reduce its net equity exposure to ranges from 0% to 20%.
The fund’s aim is to provide long-term positive returns higher than money market rates, irrespective of stock market returns.
Allan Gray Optimal Fund is suitable for investors seeking:
- A steady absolute return
- Returns regardless of stock market trends
- Require a high degree of capital stability
- A tax efficient alternative to low risk interest dominated stable funds.
Allan Gray Optimal Fund Background and Past Performance
From inception (October 2002) the fund has produced an annualised return of 8.5%, which is 2% above its money market benchmark or 3% above CPI inflation.
Returns have increased significantly over the last 2 years to an annualised 11.8%, largely due to an internal change in fund manager in March 2014 and an associated change in risk parameters. This has allowed the fund manager to double its exposure to selected shares, but which are still in well measured risk parameters.
Over the last seven months the fund has had abnormally strong returns, up 12.3% or 21.1% annualised. This is due to their selected positions performing exceptionally well.
Fund returns are fairly steady with annualised monthly volatility of 2.9%. The fund’s maximum decline in a period is 3.2%, which was in December 2015 during the Finance Minister debacle. During this period the stock market declined 7.2%.
Allan Gray Optimal Fund Investment Style
The fund takes over and under-weight positions in approximately 80 shares relative to their weightings in the All Share Index. The share selection is derived from detailed research from the Allan Gray team.
Some sector allocation is employed but mostly negated by selecting over and underweight positions in the sector. Risky sectors, such as Banks and Resources can have a maximum 15% exposure. The currency is generally not hedged in a particular direction. Ie there is minimal exposure to the currency.
Allan Gray Optimal Fund’s current major positions:
Overweight (positive view):
Naspers, Sasol, BAT, First Rand and Capitec
Underweight (negative view):
SAB, Richmond, Billiton, MTN, Gold and Platinum.
Flow of funds
The fund has doubled in size over the last two years since the fund’s rules changed to enable more risk, which boosted the fund’s performance to 11.8% p.a. over the last two years versus 8.5% from inception.
Fund Managers Views
The Fund Manager’s sector views are very much aligned with the fund’s over and under-weight positions. He expects the market to produce moderate 10% to 12% returns over the next two years and that it’s difficult to forecast the rand, and hence has a neutral Rand position in the fund. However, the Rand is undervalued (too high).
Is the Fund Manager invested in the fund?
Approximately 50% of the Fund Manager’s retirement funds are invested in the fund.
To speak to one of our advisers about the Allan Gray Optimal fund, please click here.