Coming off record-breaking outperformance in the previous year, the first quarter of 2026 saw the JSE’s worst showing since 2008, underscoring how concentrated index returns can quickly unwind in periods of heightened uncertainty. Portfolio manager Sean Munsie reflects on the Allan Gray Optimal Fund’s performance and discusses how disciplined asset allocation helped guide portfolio decisions through a period of sharp market swings.
The muted -0.6% return that the FTSE/JSE All Share Index (ALSI) delivered for the first three months of the year belies the volatility that local equity investors experienced over the quarter. The ALSI set a series of new all-time highs, last hit in late February, at which point it took the year-to-date return to 11.0%. This was driven by the continued strong performance of gold and platinum miners, which were the main contributors to last year’s stellar index returns.
The US-Israeli war with Iran, which began on 28 February, has had a profound impact on market returns. In March, the ALSI endured its worst monthly performance since the 2008 global financial crisis, with the price index falling 17.0% in US dollar terms. While the rout was broad-based across sectors, precious metal miners were the hardest hit. In previous commentaries, we have highlighted the erratic return profile of these counters and the risk this poses, given the concentrated nature of the local index. The surge in oil and broader energy prices has shifted near-term inflation expectations and the resulting interest rate outlook. Before the war broke out, the consensus, offshore and locally, favoured further monetary policy easing in the year ahead. However, prospects of a prolonged high-interest-rate and stronger US-dollar environment present headwinds for precious metals and outweigh their safe-haven characteristics.
The sell-off should be viewed in the context of, what remain, very strong annual equity market returns. This presents a conundrum for investors, as the duration of the war and its potential longer-term implications remain highly uncertain. The haphazard nature of decision-making and communication emanating from the White House complicates matters further. Using previous energy shocks as a blueprint, energy producers and consumer staples have typically outperformed cyclical stocks. In the event of a prolonged crisis and a deteriorating growth outlook, in our view, current valuations may offer insufficient support for absolute returns.
The Allan Gray Optimal Fund returned 7.1% for the quarter, with holdings in energy (Sasol and Exxaro), defensives (British American Tobacco and AB InBev) and a food producer (Premier) contributing positively to performance. The underweight exposure to gold and platinum miners as well as Naspers/Prosus also added to the return.