Three companies Allan Gray is pumping money into
Allan Gray’s two biggest local investment positions are currently beer giant AB InBev and British American Tobacco, while its biggest offshore holding is in Disney.
This was revealed by the firm’s chief investment officer, Duncan Artus, at Allan Gray’s latest The Times investment update for the first quarter of 2025.
Artus explained how the asset manager views investing and creating a portfolio, with a strong emphasis on bottom-up management.
This means the portfolio managers focus on analysing individual companies to build a portfolio rather than taking positions in businesses based on macroeconomic events and predictions.
As part of this, Artus and his team explained that this prevents Allan Gray from following the herd, which not only results in average investment returns but also gives the false illusion of safety in numbers.
Following the herd almost always results in poor investment outcomes, with irrational and emotional decisions being made due to short-term fluctuations.
Artus explained that this is not Allan Gray’s game. The firm focuses on ensuring its portfolios behave differently from those of its peers, which ensures different returns.
One key element is focusing on protecting value during downturns and not building a portfolio solely to outperform during a bull market.
In effect, the firm is willing to have lower peaks than its competitors at the benefit of having significantly lower troughs, thereby protecting value and enhancing returns.
Artus explained that herd mentality works both ways, with investors choosing to follow optimism and positivity when they should be more sceptical.
A classic case is the post-GNU rally in South African bonds and equities, which rapidly appreciated from June 2024 until the end of January.
Artus said that the GNU is a business-friendly coalition and has sent positive signals regarding reform, economic growth, and government finances.
While this is true, the rise in value of South African stocks and bonds was detached from improvements in the fundamentals of companies and the country’s economy.
The firm tries to avoid getting caught up in these waves of optimism, which may result in it underperforming slightly during a period like this.
But more crucially, it hopes to have built a portfolio that will suffer a much lower downturn when optimism is replaced by pessimism.
To explain this strategy further, Artus outlined the asset managers’ two largest local investment positions and their largest offshore investment.
These are outlined further below, with Artus explaining why Allan Gray is heavily invested in these three companies.
AB InBev
Allan Gray’s biggest position across its portfolios is in beer producer AB InBev, which bought SABMiller in 2016 to create the world’s largest producer of the alcoholic beverage.
Artus explained that beer companies have come under pressure in recent years as they have struggled to grow amid increased competition from ready-to-drink cocktails and wine.
“Beer is a very mature industry, and the one thing that has happened over a long period of time is people have moved towards consuming spirits instead of beer,” Artus said.
This has resulted in companies such as Diageo and Noca having far higher valuations than beer producers like AB InBev and Heineken.
In the last few years, something has shifted in the market, with beer beginning to win back market share through flavoured beer, lower-calorie offerings, and non-alcoholic beers.
This is set to benefit AB InBev, which owns eight of the top ten beer brands in the world, including the number one brand, Corona.
While most of its competitors work incredibly hard for 3% or 4% growth, Corona has been growing consistently at over 10% for the past eight years.
The Mexican beer is also sold at a 20 percentage point premium to the next most expensive beer in every market it is offered, making it incredibly profitable.
Crucially, AB InBev’s non-alcoholic offerings are beginning to gain traction in developed economies. For example, 12% of all beer sold in Spain is non-alcoholic.
Another key growth driver for the brand is its Beyond Beer category, which includes ciders, flavoured beer, and some cocktails.
AB InBev is also well represented in this segment. For example, its Flying Fish brand is the fastest-growing beer in the country despite stiff competition.
The graphs below show AB InBev’s market share and the rapid growth of Corona alongside its beyond beer category.
British American Tobacco
In a similar vein to AB InBev, Allan Gray’s second-biggest position is in British American Tobacco (BAT), which is one of the largest tobacco companies in the world.
Not only are alcoholic beverages and tobacco products typically resilient amid economic downturns, but they are also growing through innovation.
With regard to BAT, its main growth driver is nicotine pouches offered under its VELO brand, which gives individuals the nicotine hit without burning tobacco or vaping.
However, BAT faces immense competition in this segment, with Phillip Morris dominating the US market through its ZYN brand.
ZYN has grown at an annual rate of 57% over the past five years in the United States, generating nearly $2 billion in revenue for Phillip Morris.
In contrast, VELO’s nicotine pouches generate less than $200 million in the United States, but are growing almost as rapidly.
Artus expects BAT to take some market share from ZYN in the coming years and continue to grow to eventually generate billions of dollars in the US market.
Outside of the US, however, VELO is dominant in all markets in which it operates. It has around 60% market share in the United Kingdom, Sweden, and Norway, with over 80% market share in Denmark, Poland, and Switzerland.
While this growth story makes the company an attractive prospect, what sealed the deal for Allan Gray was BAT’s poor share price performance over the past 15 years, despite strong growth in the business’s fundamentals.
To put this into perspective, Phillip Morris trades at around 20 times earnings, while BAT trades at 9 times earnings.
This share price performance in comparison to the company’s underlying fundamentals can be seen in the graph below, as well as VELO’s expected growth and market dominance in some regions.
Disney
Allan Gray’s largest offshore holding is the Walt Disney Company, with the company’s dominant position in theme parks and experience being increasingly coupled with a profitable streaming business.
“Disney has got this great intellectual property and catalogue of movies and series, which it has been increasingly able ot use across the entire business,” Artus explained.
For example, a blockbuster movie can be turned into a segment within a theme park or even an entirely new theme park.
The same movie can then be used to drive sales onboard Disney’s cruise ships and attract people to its streaming platform.
These parts of the business are increasingly being used in tandem rather than individually, with new movie releases driving demand for shows on Disney+, for example.
“So what is really important is that when Moana 2 came out, the number one streamed movie on platforms in the United States was Moana 1,” Artus said.
“Over its lifetime, Moana 1 has over 1.4 billion hours of streaming on Disney+. So when Moana 2 comes off circuit, it goes onto the platform and becomes the number one streamed show.”
Artus admitted that Disney has been losing money on streaming for many years as it has built out its offering, but it is now generating a profit.
“They are making a few hundred million dollars now. Netflix is worth $520 billion, with the entirety of Disney only being worth $200 billion.”
“So, we think in streaming if they can just get to half of Netflix’s margin, Disney+ will become as valuable as the entire company is right now, excluding ESPN,” Artus said.
But the core of Disney’s business is its resorts, with six around the world currently and a seventh opening soon in the Middle East.
Disney also has six cruise ships, which are immensely profitable for the company. Overall, the resorts and cruise business make up 60% of Disney’s revenue.
“This is a very hard business to replicate. You would have to spend around $70 billion just to replicate it as it currently stands, with Disney planning to spend $60 billion expanding this part of the business in the next decade,” Artus said.
Disney’s resorts business is the largest leisure business in the world, making more money than hotel giants such as Marriott and Hilton.
The company’s impressive resorts business and intellectual property can be seen in the graph below.
Comments