Allan Gray Namibia Stable Fund

South African assets performed strongly following the formation of the new government of national unity (GNU) in June, and this performance continued into the third quarter. Year to date, South African shares returned 15.9%, as measured by the FTSE/JSE Capped Shareholder Weighted All Share Index, and South African bonds returned 16.7%. While Namibian bonds also performed strongly, returning 13.5%, Namibian equities, as measured by the FTSE NSX Local Index, lagged significantly at 7.7%, but still outperformed cash. Over the same period, the Fund delivered a return of 8.0%, ahead of its benchmark of 5.8% and year-on-year CPI inflation of 4.4%. The Fund’s South African and Namibian share bond holdings helped boost year-to-date performance, as these asset classes have outperformed cash.

The Fund aims to generate returns ahead of bank deposits and inflation, while maintaining a high degree of capital stability and minimising the risk of loss over any two consecutive years. As discussed in previous commentaries, going into a year with several important elections, the Fund was carefully positioned to achieve these objectives regardless of the outcome. An even higher allocation to risk assets would, of course, have delivered an even higher return, but this is easy to see in hindsight. While the South African elections ultimately resulted in a market-friendly outcome, this was far from certain in the run-up to voting day. Even after the initial election results were declared, there was still much ambiguity about the form the ruling coalition would take.

Short-term prospects for consumers are looking better than a year ago, with both the Bank of Namibia and the South African Reserve Bank cutting interest rates by 25 basis points over the quarter. Moreover, the reprieve in loadshedding has reduced non-productive expenditure which should improve profit opportunities for South African companies. Beyond these temporary tailwinds, however, in the South African context we remain concerned about growth prospects. Opposing ideologies between and within the GNU’s coalition partners are likely to cause complications down the road and, in the meantime, South Africa still faces serious structural issues. These include the ongoing challenges at Eskom and Transnet, as well as deteriorating state infrastructure. It is therefore possible that the recent enthusiasm, which has seen South Africa outperform many of its emerging market peers, has gotten ahead of itself. We carefully weigh up these considerations as we review the investment cases for South African assets, and despite the broader structural concerns, we continue to find compelling opportunities.

At yields of around 8%, the return on money market instruments is currently attractive in real terms and, as a result, the Fund’s cash balance has remained substantial over the quarter. In our view, cash is a valuable source of optionality, giving us the flexibility to take advantage of opportunities as they arise. The Fund continues to have a large allocation to bonds, the majority in Namibia. It is a reflection of the decent real returns on offer even after the bond rally and an improving fiscal outlook for Namibia. The Fund takes little credit risk.

The rand and the Namibian dollar have strengthened in the months following the South African election, causing the Fund’s foreign exposure to be a drag on performance. The same can be said for “rand hedge” shares, such as Anheuser-Busch InBev (AB InBev). The Fund maintains a foreign exposure of 28%, with the ability to increase this up to 40%. Currently, close to half of the Fund’s offshore allocation is invested in low-risk instruments such as cash or cash-like securities and hedged equities. The foreign component of the Fund remains a useful source of protection against negative developments locally and in South Africa or a pullback in Southern African asset prices.

Commentary contributed by Birte Schneider and Tim Acker