2016 was a tough year for the majority of retail investors that were underweight resources and overweight small and medium-cap shares.
It was the same story for fund managers, with many of the best performing managers from previous years failing to deliver anything close to the 11.8% returned by the S&P/ASX 300 Accumulation Index.
One fund that didn't have that problem was the Allan Gray Australia Equity Fund. As reported in the Fairfax press, financial research firm Mercer rated it the top-performing Australian equity fund for 2016 after it delivered a spectacular return of 34.8%.
According to the fund's website, "The Fund aims to buy shares that offer long-term value. Often, this involves selecting shares that are currently undervalued or not well known to the general investing community, with a view to benefiting when the value is recognised, investor sentiment changes, and the price rises".
Before investors get too excited however, it should be noted that the fund's longer term performance has not been anywhere near as impressive. In fact, the fund's annual average return over the past 10 years has been 7.1%.
Nonetheless, I still think it is a very useful exercise to consider how the fund generated its performance and what shares the fund manager believes could deliver above average results moving forward.
With that in mind, I have highlighted the fund's top 10 positions as at 31 December 2016:
| Company | Market Capitalisation | 1-Year Shareholder Return |
|
Woodside Petroleum Limited (ASX: WPL)
|
$26.9 billion | 19% |
| Alumina Limited (ASX: AWC) | $5.1 billion | 80.7% |
| Origin Energy Ltd (ASX: ORG) | $12.6 billion | 78.6% |
| Newcrest Mining Limited (ASX: NCM) | $16.8 billion | 71.3% |
| Metcash Limited (ASX: MTS) | $2.1 billion | 25.7% |
| Sims Metal Management Ltd (ASX: SGM) | $2.5 billion | 89% |
| AusNet Services (ASX: AST) | $5.7 billion | 14.4% |
| National Australia Bank Ltd. (ASX: NAB) | $82.2 billion | 19.4% |
| Worleyparsons Limited (ASX: WOR) | $2.5 billion | 194.4% |
| Southern Cross Media Group Ltd (ASX: SXL) | $1.1 billion | 38.8% |
It is pretty clear from the list of shares above that the fund's outperformance was driven largely by its overweight exposure to the energy and resources sectors.
Interestingly, the top 10 positions accounted for around 61% of the total value of the fund. Other notable holdings include Nine Entertainment Co Holdings Ltd (ASX: NEC), Woolworths Limited (ASX: WOW) and Fairfax Media Limited (ASX: FXJ).
Although the fund has a clear strategy of buying unloved and undervalued shares, I personally wouldn't be a long-term buyer of any shares highlighted above.
