Allan Gray’s Duncan Artus is preparing to take the reigns as the Chief Investment Officer (CIO) of South Africa’s largest privately owned investment firm from September. Allan Gray has about R500bn in assets under management, with a fair chunk of this managed offshore through Orbis. With the volatile investment market and unpredictable global economy, can Artus build on the solid foundation set by his predecessors? In this interview with BizNews founder Alec Hogg and stock market expert David Shapiro, the CIO designate reveals his plans for the future and why he believes that managing money is not only about numbers but about managing emotions, too. – Ronda Naidu
AH: Duncan Artus, the new Chief Investment Officer designate, because he only takes over in September. Dave Shapiro, before we asked Duncan Artus about various bits and pieces in his new role, have you got anything to ask now that he’s going to be the guy who looks after these gazillions that are entrusted to Allan Gray?
DS: I’m a great Allan Gray follower. I get all their documents, etc. and they’re true to where they’ve always been and always had a very specific style of investing. You have to ask Duncan as CIO, if he’s going to move off this path or whether he’s still going to remain loyal to the way that I have always managed portfolios, especially the kind of environment that we find ourselves now?
DA: Yes, we’ve been doing the same thing for almost 47 years and most asset managers that are independent of a life company or investment bank don’t last that long. Some people move, some people start fighting. You have periods of underperformance and outperforming the benchmark is hard over long periods of time.
What’s worked for 45 years, would you want to change it? No, but we’re always making incremental changes. If you look in South Africa each little bit you outperform is more valuable than it was when I started. There are a lot more good competitors and the South African equity market has got a lot more competitors about. So every little incremental improvement you can make to your process, a good example for us is a fixed income fund. People think of us as equity and balanced managers, but our best performance over the last year has come from our fixed interest portion of the portfolio. We spent a lot of time improving the process. It’s all about improving processes.
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AH: There’s been quite a lot of criticism of Allan Gray in the last little while, is that relative performance, does that impact the change there?
DA: No. Andrew Lapping‘s been at Allan Gray for 20 years, the same length I have. He’s looking to do something different. As a CIO, you have a one-year notice period. I’ve known about Andrew for a long time. Then what happens is the CIO recommends a successor to our remuneration committee and so it’s a very structured process. It’s just how you announce these things because we were going to announce in March but then the virus came. Andrew is only leaving in September. The performance has really been dragged out by the last 15 or so months.
It’s really just last year and this year that’s been tough and that can drag down the longer-term numbers. If you think at the moment a good return could be five and a bad return three, the difference between the two is very small. Then the other big part of it has been Orbis. As I mentioned, the shares that you and David have been speaking about, they are very underweight in the US, they’re very, very underweight disruptors. I think you would know, that this sort of disparity between value and, let’s call it growth is about 3 standard deviations or something. We think the best part of the performance is going to come from the offshore part of the portfolio if any mean reversion happens.
I think Nedbank is worth 100% more than its current share price. Does it get there in a straight line?
AH: Is it a mean reversion when you’ve got an exponential company?
DA: Yes, let’s think of Microsoft, it’s a trillion-dollar company. Let’s say you want a 20% return. You have to add $200 billion of value. They have to find a new profit stream on a 20 multiple that makes a 10 billion profit. If you start looking through Amazon and Apple, just to make a difference to the valuation, they have to take over entire new industries – just to make up with some kind of growth.
In reality, Facebook and Google are all advertising companies. At some stage, digital advertising reach a certain level and it doesn’t take any more market share. Then what are they? Typically these companies have always been taken down by regulation. Are they fantastic businesses? Yes, they are. Do I think everybody owns them? Yes, they do. How do I think they are on big absolute valuations? Is Amazon got to be a $2 trillion company, a $3 trillion company?
Whereas if I look at something like Nedbank in South Africa, as an example, no one wants to own an emerging market financial stock. I think Nedbank is worth 100% more than its current share price. Does it get there in a straight line? I have no idea. I just think that everyone’s is positioned the same way.
AH: I’ve got a table on or a graph on the table here, on the left-hand side, it talks to your main holdings in the portfolio. Given what you told us a little earlier, is it likely that these aren’t going to change too much when you take over in September?
DA: Yes, it’s very important for everyone to remember that there are four managers who manage the balance fund and it’s only Andrew who is changing. And then we are promoting portfolio managers Tim Acker and Rory Kutisker-Jacobson. Tim has been Allan Gray for seven years and Rory for 12. Very experienced people. Remember that the CIO at Allan Gray doesn’t tell everyone what to do, but you do need someone is ultimately responsible, that the board and clients can look to.
I’ll be managing a slightly bigger slice of the money that I used to, but the vast majority of the fund is still going to be managed by the same people who’ve managed it the last 5 years. Remember, we’ve done this transition over a number of times, Simon Marais was CIO when I joined, it was then over to Steven Mildenhall, then Ian Liddle, Andrew and now myself. We don’t have individual people who run funds, it’s a sort of multi-manager approach.
AH: It’s extraordinary. So in all that time, 20 years, there have only been four CIOs?
DA: Yes, five now with me. It’s even more remarkable if you think about the impact Simon made, he was only CIO for three years. It doesn’t feel like it when you think back. Simon moved to London to help with Orbis. Clients never expect anyone bad to be promoted at Allan Gray. That’s because we’ve got this very, very thorough process, difficult process that people need to get through before they can get to a level where we promote them as portfolio managers.
We’ve actually managed transitions like this pretty well in the past. At least we can point back to history and say, yes, some good people have left, but there’s always been someone else who’s taken over who’s been good, across the whole team, that should give clients a lot of confidence.
AH: How are you growing timber, how are you growing the next Simon Marais?
DA: What we’ve typically had is we’ve got the portfolio manager at the top. In fact, this is probably the most experienced people we’ve ever promoted in the firm. People start at the bottom as an analyst. You are expected to cover many different sectors, we don’t believe in having sector specialists. You write reports and then as you get advanced the team, there is more expected of you. Then analysts get to manage something we call an ARL, which is a paper portfolio. The main job is still to be an analyst and they are given, a very real-life R10 billion portfolio that trades off the prices and the volumes.
We have a long track record for people who we are going to promote how they manage money on their paper portfolio. There’s also a quantitative thing to it, how did we deal in situations? We’ve got a long track record of reports, what shares they recommended. Managing money, as I’m sure David knows, is a lot about EQ as well. If it was just up to clever about people, everyone who runs money would be a Harvard professor. There are lots of good people who have made money and who are not necessarily the best people at numbers. A lot of it is managing the emotions. When you go through a performance, how do you react to it? We take all those things into account.
AH: How do you manage your emotions? Given what we’ve learnt from Warren Buffett and Charlie Munger, you don’t have to be a rocket scientist, which aligns with what you said, but you have to be able to keep your emotions in check.
DA: The most important thing I can say is we always say if you took an average investment team and you put them in the Allan Gray structure, they produce above-average results. It’s actually not me, it’s the structure. What is your ownership structure? Does it allow you to take a long term view? How are the incentives of the portfolio managers linked to the outcome of the clients? Do they just get big bonuses even if performance is bad?
I’ve lived through a lot of cycles. I’ve tried to read about every great investment book there has ever been and that’s the amazing thing about investments: Great managers are willing to share what their thoughts were. Some individuals act slightly differently each time, that’s up to each sort of individual in my point of view. It’s the structure and process of the ownership that to me is far more important than having smart and hardworking people.
AH: How did you handle Sasol? We’ve spoken about this in the past, the share price jumped all the way down to R21, you guys were big shareholders, then you were selling. Did you get back in at R21?
DA: No, we didn’t get back in at R21. We brought a little bit but I think, when you look at Sasol, there are two things to think about. When they had the second cost overrun, we reduced its risk weight. What I mean by that, we couldn’t buy more at a certain level in the portfolio because you realise, well, if you have another billion-dollar overrun and times it by 15, it starts to become big numbers in rands. You’re relying on chemical prices and oil prices to bounce in the short term, which you just don’t know, even though they have.
Then you also have to think about it from another point of view, it’s not clear yet, the chances are getting less where the oil price and chemical prices up but there was a chance that Sasol needs a rights issue, and it wasn’t going to be a small amount of money. If you had R1 in Sasol, you didn’t really have R1. You had R1 plus the extra money you had to put in. So we were thinking, when you think of position size, if Sasol was going to be a rights issue, how much do we want to own now, and where would it be it you had to put more money in?
It’s a strange world, if oil goes back to 80, Sasol could be back over R300. It is pretty remarkable, even though it’s gone up 6 times from the bottom, you still sit with the same sort of problem that if the oil price and chemical price collapse again. In the short term, you do have the R190 billion of debt, but they have said, or there have been news stories, that people are looking at buying a stake in Lake Charles. If I can sell a stake for $2-3 billion, that’s sort of 45, 50 billion dollars of debt you can repay, and then the company starts to look a bit different. We just apologise to everyone out there, if you think in the last 10 years, you hopefully don’t have shares like this more than once every 10 years.
AH: David, when we spoke a couple of weeks ago about Sasol, you made the point that it was a day trader’s delight. It certainly moved me enough to get it out of our portfolio. I see the share price has been whipsawing a little bit around these levels. Would you be recommending to Duncan that he piles back into Sasol now?
DS: Not at all. When we said it was a day trader, it was the US day traders. They suddenly decided that this is where they’re going to throw their daily money. It just became crazy. From my point of view, there are too many issues there that we have to negotiate to make it an attractive buy, which we can’t negotiate. One is the oil price, chemical prices as well.
One has to look at the manager and how this whole thing has been managed, the cost overruns and so on. I don’t want to look for trouble. I’m in a different camp, whether it’s value or not, to me there are too many things around Sasol to make it attractive. The difference between Duncan is that I have to look at my clients in the eye, I don’t do it through a third party. They sit at me around the table, and if I lose their pension, it’s hell.
AH: A good point indeed. Looking people in the eye, do you look at them in the eye at all? Surely you would have certain people that you have to explain to.
DA: I think I did 65 client presentations last year. We go from the biggest pension funds in South Africa to webinars with 1,700 people. Trust me, we look clients straight in the eye. People have a very high expectation of us. Sometimes when you do well, it’s because of Allan Gray. When you do bad, it’s because it’s Duncan. We need to manage those sort of processes.
AH: Well, congratulations on your appointment, even though you knew about it almost a year ago. It’s nice to be able to talk to you again, Duncan, and look forward to picking up with Allan Gray in the future. Before we say goodbye to you, how big is Allan Gray now, what kind of asset base are you looking after?
DA: It depends on which week you pick at the moment, but it’s around about R500 billion, but remember a large chunk of that is managed by Orbis.
