The Stable Fund’s performance over the past year has clearly been disappointing. We aim to generate returns for our clients that exceed inflation by at least 3%, while minimising price volatility. Since inception, the returns only exceeded inflation by 0.5% per year as a result of poor stock selection by both Allan Gray and our offshore partner, Orbis.

Both Orbis and Allan Gray manage risk by investing in what we believe are undervalued assets, and by positioning our portfolios for a range of potential outcomes. Over time, this strategy results in lower drawdowns and better absolute returns. Our starting point is 100% Namibian cash and we only buy equity, property or Orbis funds if our expected return from these assets exceeds the expected return from cash. Over the recent past, many shares which were trading at a discount to our fair value estimate have fallen further in price. All else being equal, the discount to fair value, and therefore the expected return from these equities, should have increased. An example is mining company, Glencore, which we discussed in the June factsheet commentary. We bought the share at an average price of R51 over the past year; the price is now R46. Our expected return from here is clearly higher than when we started buying, as our estimate of normal earnings and fair value is unchanged. In the case of Glencore, we expected the share to outperform cash from a starting point of R51; we now expect the share to outperform cash by an even larger margin from a starting point of R46.

The future is extremely uncertain, so we cannot plan for only a single scenario. Three years ago, the inflation rate was 6.9% and short-term interest rates were 8.1%. One scenario would have been flat interest rates, steadily falling inflation, a stable Namibian dollar and a flat equity market. In this scenario, the asset class of choice would have been Namibian money market assets. As it has happened, this is the scenario that played out, but there are many other scenarios that could just as easily have occurred.

So just because a scenario that favoured a certain asset class transpired over the past three years, does not necessarily mean this will be the case for the next three years. Namibian real interest rates are currently very high, which favours local fixed interest assets. We have 40% of the Fund invested in local fixed interest assets, but there are other scenarios that could see substantial rand weakness, which favours international investments. Accordingly, we have 33% of the Fund invested internationally. We think the 38% of the Fund we have invested in equities and property will outperform cash in the majority of scenarios, as we only invest in shares where we think there is a very comfortable margin of safety between the expected equity return and the cash return. This is the same methodology we applied 12 months ago, however, the equities in the Fund returned negative 7% over the past year, compared to the cash return of 7.1%. The same applies to the foreign portion of the Fund, which returned negative 4% over the past year.

Commentary contributed by Andrew Lapping and Birte Schneider