After a strong start to the quarter, markets reversed course in March as global risks came back into focus. Portfolio manager Tim Acker reflects on the Allan Gray Stable Fund’s performance over the period and outlines how the Fund continues to prioritise valuation, downside protection and capital stability in volatile conditions.
The quarter began on an optimistic note, with both local and global markets extending last year’s gains. That changed abruptly in March as the US-Israeli war with Iran escalated, and investors weighed the risk of a more persistent energy shock and lower global growth. On home soil, the South African Reserve Bank kept the repo rate unchanged at 6.75% in March. If oil prices remain above US$100 per barrel, absent lasting government relief, this would add at least 1% to South Africa’s inflation rate – likely more after accounting for knock-on effects.
Locally and globally, there has been a clear shift in sentiment over the quarter. The FTSE/JSE All Share Index ended the quarter 0.6% down, having been up 11% at its intra-quarter high. Similarly, the FTSE/JSE All Bond Index fell 3.4% after trading materially stronger earlier in the period. Against this backdrop, the Allan Gray Stable Fund returned 3.5% for the quarter and remained ahead of its benchmark. While we do not place much weight on short-term relative performance, it is encouraging that the Fund was able to preserve capital and deliver a positive absolute return in a quarter when local equities, local bonds and global equities declined.
The reversals in March are a reminder that markets can move quickly from pricing a benign combination of lower inflation and easier policy to pricing supply shocks and heightened geopolitical risk. For a fund with capital stability as a core objective, valuation and downside risk matter as much as upside participation. At quarter-end, the Fund remained positioned conservatively but with sufficient flexibility to take advantage of dislocations. Net equity exposure was at 30%, comfortably below the Fund’s 40% maximum. The Fund has a meaningful allocation to hedged equities, which protect against declines in local and global markets. This was very beneficial during the March market correction. The Fund’s fixed income positioning also remains conservative, with relatively low duration and a large holding of cash and near-cash instruments. Having liquidity readily available gives the Fund valuable flexibility to take advantage of opportunities that can arise during periods of heightened market volatility.
It is important to remember that 2025’s local equity and bond returns were exceptionally strong. While we would not expect a repeat of these returns, there are still ample opportunities on offer in the local market. Outside of the precious metals sector, which drove market performance in 2025, many SA Inc. shares are, in fact, relatively depressed. South African bond yields rose during the quarter as investors reassessed the outlook for inflation, growth and domestic monetary policy. Higher bond yields improve prospective returns, but we continue to weigh this up against other opportunities and remain cautious about many of the structural challenges facing South Africa, such as the government’s fiscal challenges and slow reforms at state-owned enterprises.
The rand touched levels below R16 to the US dollar during the quarter, its strongest level in nearly four years, as South Africa’s trade account benefited from the windfall of last year’s significant increase in gold and platinum prices. The level of the Fund’s offshore exposure is primarily driven by where we see the most attractive opportunities, rather than taking a directional view on the rand. While we continue to see global markets as relatively expensive, the Fund’s offshore holdings are meaningfully differentiated and, pleasingly, have performed well ahead of global indices during the quarter. The Fund’s 36% offshore exposure is also an important source of diversification. As seen again this quarter, periods of global market stress often lead to a weakening of the rand. In such scenarios, the offshore allocation serves as a useful ballast, offsetting declines in local market prices. It is important to note that while heightened geopolitical uncertainty clouds the outlook for short-term returns, the Fund remains defensively positioned overall, aiming to both protect value and deliver returns ahead of cash in the medium term.