Key equity markets have shone over the last quarter, inspiring many investors to chase the rally. Tim Acker discusses the Allan Gray Balanced Fund’s recent performance and positioning in the current environment.
The Balanced Fund has delivered 19% year to date, outperforming its benchmark by 4%. Over the last three years, the Balanced Fund has achieved an annualised return of 17%, compared to inflation of 4%. While the performance is pleasing, we recognise that the level of real returns generated is higher than what we would expect the Balanced Fund to sustain over the long term.
The Balanced Fund has benefited from the tailwinds of strong local and global markets. Locally, the FTSE/JSE All Share Index (ALSI) reached an all-time high, surpassing the 100 000 level for the first time and delivering a 32% year-to-date return. However, the strength of the index has been narrow, driven largely by gains in Naspers/Prosus and precious metal shares. Much of the broader market has lagged. Many domestically focused companies (SA Inc shares) have surrendered the gains made in 2024, as initial optimism around the government of national unity has not yet translated into materially stronger economic growth. We are finding more bargains among local shares where valuations have become more attractive. On a relative basis, our positioning in local equities has detracted from year-to-date performance. This includes an underweight position in precious metal shares, as well as underperformance from some of the Balanced Fund’s multinational shares, such as brewer AB InBev and paper and packaging group Mondi.
Local fixed income has continued to perform well, supported by declining global interest rates, expectations of lower inflation and a lower repo rate in South Africa, and a reduction in the risk premium demanded by foreign investors. Despite this, we remain cautious, given our longer-term concerns about South Africa’s fiscal position, and therefore maintain conservative positioning. Cash remains an attractive alternative and provides valuable optionality. The Balanced Fund has benefited from its preference for equities over bonds.
Gold shares have delivered exceptional recent returns and now account for 16% of the index. While each company has its own idiosyncratic fundamentals, the dominant driver has been the rising gold price. Gold and shares of gold mining companies can offer valuation diversification benefits in a portfolio. At the current gold price, valuations for gold shares are not high, which adds to their appeal. However, forecasting the gold price with confidence is notoriously difficult, so some humility in this area is advised. History reminds us that most gold mining companies have been poor businesses over the long term, often destroying value through acquisitions or overspending on new projects. We balance these factors by carefully considering the Balanced Fund’s total exposure to the sector, without blindly anchoring to the weight in the index. We encourage readers who are interested in finding out more about our view of gold and gold mining shares to read our article on gold in our Q2 2025 Quarterly Commentary and to listen to episode 28 of The Allan Gray Podcast.
Global markets have extended their strong run, with a 17% year-to-date return for the MSCI World Index. The Balanced Fund’s offshore allocation has produced strong relative returns, making a meaningful contribution to overall outperformance of its benchmark. This may be surprising given our significant underweight to the US and mega-cap technology shares. Noteworthy contributors have included defence companies, critical energy infrastructure and select idiosyncratic opportunities, such as AI infrastructure company Nebius Group. We continue to view global markets as fully valued, with prices reflecting high expectations. This suggests an environment that calls for caution. The Balanced Fund’s global holdings continue to look very different from the World Index.