Allan Gray’s warning for South African investors

Allan Gray portfolio manager Jithen Pillay has warned that shareholders may not reap the full rewards of the surge in precious metals prices in recent times. 

This is because of the tendency for windfall gain to be eroded by poor cost discipline and expansion from mining companies. 

As a result, Pillay explained that Allan Gray’s equity fund has been highly selective about the precious metals miners it includes in the portfolio. 

The fund exhibits a strong preference towards mining companies with a track record of returning free cash flow to shareholders rather than pursuing expensive expansion deals or mergers. 

This positioning has impacted the performance of Allan Gray’s equity fund in the short term, with the domestic component of the fund underperforming the JSE All Share Index. 

The JSE All Share Index delivered a 42% return in 2025, which is the index’s best calendar year performance in two decades. The index repeatedly hit new all-time highs throughout 2025. 

However, this performance was extremely narrow, as it was driven by a handful of precious metal mining companies that rallied strongly. 

These mining companies saw their share prices more than double in 2025, with them contributing 58% of the All Share’s return for 2025. 

“While we have a constructive view on the gold price over the longer term, in the short term, the price will likely be volatile amid shifting geopolitical and macroeconomic conditions,” Pillay said. 

“South African gold miners also have a poor long-term track record. Historically, gold price windfalls have often been eroded by poor cost discipline and value-destructive expansion.” 

The positioning of the domestic component of the equity fund forms part of the portfolio’s overall leaning towards defensive companies and sectors. 

“Given current valuations, we are concerned about the prospects for absolute returns bost globally and locally,” Pillay said. 

“In South Africa, a slow reform agenda, anaemic capital investment and infrastructure concerns underpin our view that meaningful economic growth will remain elusive.”

As a result, the fund’s domestic component is skewed towards defensive rand hedges, such as British American Tobacco and AB InBev. 

“Where the Fund holds South African-exposed stocks, they are businesses that we believe can sustain earnings growth even in a weaker-than-expected economic environment,” Pillay said. 

Mining conundrums

Allan Gray’s Pillay is not the only one to warn of the potential for investors to lose out in the surge in precious metals prices. 

Coronation Top 20 fund managers Neville Chester, Nicholas Stein, and Nicholas Hops previously warned investors that increasing their exposure to gold may result in significant losses in the coming years. 

They explained that this is because of the tendency for costs to follow prices higher, as mining companies invest heavily in increasing production and aggressive expansion. 

For the third quarter of 2025, Coronation’s Top 20 fund underperformed its benchmark due to its underweight position in gold shares. 

The fund’s only major exposure to precious metals was its holding in Northam Platinum, with it largely missing out on the surge in mining stocks. 

“We note a significant investment conundrum for both gold and gold equities. Both the gold price and South African gold miners are trading at all-time highs, with commentary suggesting we are in the ‘frothy phase’ of a bull market,” the fund managers said.

Historically, the fund managers pointed out that every comparable gold bull market has been followed by a downcycle, resulting in steep losses for shareholders. 

“Costs tend to follow prices higher, albeit with a lag. We expect the same from this cycle,” the fund managers said.

Typically, during commodity booms, miners increase their capex on expanding existing operations, building new mines, or granting significant salary increases to employees. 

When the market turns and commodity prices plunge, this results in many having to substantially cut costs, typically in the form of job losses. 

South African gold miners are notoriously sensitive to these swings due to their elevated operating costs and the steady decline in reserves.

“South African gold miners are characterised as inherently poor businesses due to being high-cost and having short mine lives that necessitate ongoing capital expenditure,” they said. 

“These companies have historically been poor stewards of shareholder capital, exhibiting poor cost control, engaging in value-destructive corporate actions and failing to return cash to investors consistently.”