Allan Gray Stable Fund defensively positioned to navigate challenges

For conservative long-term investors, typical goals in today’s environment may include preserving capital while still achieving above-inflation returns over the long term. Considering the local and global risks that abound, Allan Gray Portfolio Manager Sean Munsie reflects on the first quarter of 2025’s performance, opportunities in the environment, and what this may mean for conservative investors going forward. 

The first quarter of 2025 saw the local equity market add to the strong gains posted in the preceding year, with the FTSE/JSE All Share Index returning 5.9%. Among the largest contributors to returns at the index level were precious metal miners, telecommunications providers, and the dual-listed consumer goods companies, including AB InBev, British American Tobacco and Richemont. Gains for the local banks, insurers and retailers have either begun to stall or go backwards, while the diversified miners and other cyclical rand hedges Sasol and Mondi have continued to struggle in the new year. The FTSE/JSE All Bond Index eked out a 0.7% gain for the quarter, as the risk premium ascribed to local government bonds increased, particularly on longer-dated instruments. The faltering US market contributed to declines in the MSCI World Index and the S&P 500, which returned -1.8% and -4.4% in US dollars respectively over the quarter.

Against this backdrop, the Allan Gray Stable Fund returned 3.1% for the quarter – 1.0% ahead of its benchmark.

Gains for AngloGold Ashanti, Gold Fields and DRDGOLD have been particularly strong, with share prices more than 50% higher year-to-date in rands – this as the gold price breached $3 000 per ounce for the first time and continued to set new highs. Predominant trends, including diversification away from the US dollar with increased interest in gold as a reserve asset, fears of stagflation in developed economies as growth slows, and political and trade uncertainties, remain more relevant than ever. Despite this, equity investors remain sceptical of the trajectory of the gold price, with valuations of the miners, including those mentioned above, screening as very compelling at the spot price.

The offshore component of the Allan Gray Stable Fund was a contributor to overall returns, primarily driven by stock selection. Defence-related holdings were among the leading contributors, having benefited from increased global defence spending and European government commitments to future defence investment. US dollar weakness also aided returns, given the Stable Fund’s underweight exposure. The offshore component has been positioned against the narrative of American exceptionalism for some time and continues to have limited US exposure.

Looking ahead

It is worthwhile noting that continuing market upheaval poses a possible threat to wider risk asset returns – namely, the sustainability of the government of national unity locally following the conflict-ridden Budget process and the ratcheting up of global trade tensions after President Donald Trump’s ‘Liberation Day’ tariff announcements. We have concerns regarding unsustainable valuation levels both locally and globally, and what this may mean for future returns. This, coupled with geopolitical pressures and elevated uncertainty, makes for increased market volatility ahead.

In our opinion, the Allan Gray Stable Fund has a current defensive positioning in terms of stock selection, a 25% net equity weight (which is below the 40% maximum), its sizeable asset allocation towards hedged equities, and its lower-duration bond holdings ensures that we are well placed to navigate these challenges.