The Fund invests primarily in shares listed on the Johannesburg Stock Exchange (JSE). The Fund can invest a maximum of 45% offshore. The Fund invests the bulk of its foreign allowance in equity funds managed by Orbis Investment Management Limited, our offshore investment partner. The Fund is typically fully invested in shares. Returns are likely to be volatile, especially over short- and medium-term periods.

The Fund returned 5.8% for the quarter and 25.7% for the year. During the fourth quarter, the largest contributors to returns were the basic materials and consumer staples sectors. The local equity market rallied strongly into the end of 2021, but this followed a third quarter in which the market was down. Returns from the JSE in 2021 were 29.2% as measured by the FTSE/JSE All Share Index (ALSI) and 27.1% as measured by the Capped SWIX. These numbers are of course reasonably high by historical standards. For context, over the last 40 years the ALSI has returned 16.3% p.a.

There is a seeming contradiction between strong equity market returns on the
one hand and a weak South African economy on the other hand. How should
we interpret this divergence? Firstly, it is very common for the performance of
stock markets to diverge from economic performance, especially in the short
term. Markets take a forward-looking view and often look through the shortterm
impact of issues like COVID-19. Secondly, the fortunes of many JSE-listed
companies are not really linked to South African economic growth. This would
include international businesses like Richemont and commodity exporters like
Impala Platinum. On a rough analysis, earnings for about half the JSE are not
directly linked to the SA economy.

Following this strong performance, the ALSI closed 2021 29% higher than it was
at the start of 2020, i.e. before the onset of the pandemic. Does this mean that
the JSE is now expensive? Not necessarily. Overall valuation levels are not high
compared to history. The Capped SWIX has also returned only 7% p.a. over the
last five years, despite this recent strong performance. Allan Gray’s philosophy
is to not take a top-down view of where markets are heading, but rather to
do bottom-up research on individual companies. Our fundamental research
approach currently reveals more than enough attractive opportunities, which
makes us cautiously optimistic about medium-term returns.

Of course, there are many risks from the global and SA macroeconomic
environment, but these are balanced by the low prices at which many
businesses are trading.

The South African banking sector is an example of where we are finding
attractive valuations. Large banks like Standard Bank and Nedbank can be
bought at around seven times 2022’s earnings. This is very cheap by historical
standards and compensates for issues such as increasing competition and
a tough economic outlook. Current earnings are also still depressed but
should recover to pre-COVID-19 levels in the next year or two. Bad debts have
been lower than many investors had feared. Lower participation from foreign
investors in the SA market has contributed to depressed valuations of SA
financial stocks.

Remgro is another example of an undervalued business. Remgro owns a
portfolio of quality South African businesses, many of which are listed. These
businesses themselves trade on reasonable valuations. On top of this, Remgro
trades at a nearly 40% discount to its underlying portfolio – a large, and we
think undeserved, discount compared to history and other holding companies
globally. Management is taking several actions to unlock value within this
portfolio. Examples include the recently announced transactions between
beverage businesses Distell and Heineken and between fibre holding company
CIVH and Vodacom, as well as the planned unbundling of some insurance
assets by Rand Merchant Investment Holdings.

During the quarter the Fund bought Gold Fields, Mondi and Anheuser-Busch and
sold Standard Bank and RMI.