Chief Investment Officer
14 October 2020
The Gryphon multi asset funds moved out of equities in August of 2018. Since then, markets have given and taken away and given back again; these funds have remained equity-free, taking advantage of what we considered to be risk-adjusted opportunities.
The philosophy of these funds is to be fully exposed to equities in a bull market, but in periods of volatility and equity bear markets, the portfolio manager will consider alternate asset classes with a better risk-return profile given the stressed profile of equities. The graph below illustrates the effectiveness of this philosophy, comparing the performance of the Gryphon Prudential Fund to the FTSE/JSE All Share Index since the inception of the fund, as well as to the average of the fund’s category, the SA Multi Asset High Equity index.
The purpose for doing this is twofold: to illustrate the effectiveness of the fund’s asset allocation philosophy versus its peers; and to illustrate how the multi asset funds average mirrors the FTSE/JSE ALSI rendering the concept of asset allocation moot.
The Gryphon multi asset funds have delivered a return of 19% over the past year; this despite the fact the fund has no equity exposure at all over this period. Having received some inquiries on this, we have unpacked the ‘vooma’ the funds enjoyed as a result of the funds’ exposure to the bond market since April 2020. But, before we do that, it’s also interesting to consider the contribution of the parts; the underlying asset classes. The graph below illustrates the annual return of each individual constituent (asset class) as well as the performance of the whole, i.e. the multi asset funds, since their inception in April 2014.
As mentioned above, the funds have had a very high exposure to bonds since April 2020. The table below sheds some light on this exposure as well as the exposure to cash and equities. It also illustrates the performance of the Gryphon Prudential Fund as well as the growth/inflows of the portfolio from the months March to September 2020.
At the end of March the portfolio was exposed to cash. With the exit of South Africa from the WGBI and the sovereign downgrade, bond yields sold off providing the opportunity to enter into a position at very good prices.
A lot of the value inherent in the bond market unlocked fairly quickly, over the months of April and May.
With the cuts in short rates instituted by the South African Reserve Bank, the short end of the curve (less than 3 years and represented by the R2023 and R186), rallied hard and quickly:
What is clear from the above graph is that the extent of the rally in the short end was not matched by the long end. Longer dated bonds continue to offer more value while shorter-dated bonds were in high demand as interest rates were aggressively lowered over this period. The spread between longer and shorter dated bonds increased meaning that longer term bonds offer a substantial yield pick-up over its shorter term equivalent.
The table below reflects exposure of the fund to the various duration buckets of theGOVI Bond Index:
Evident from the above, is the replication of the GOVI Index on entry into the bond market in April 2020. The rally at the short end of the curve, however, presented an opportunity.
We therefore sold out of the short bucket and increased our exposure to cash and longer-duration bonds as opportunities arose. The combination of Cash and exposure to the 7-12Yr and +12Yr buckets provides the fund with equivalent duration to the GOVI Index.
Cash in addition, provides us with the liquidity to engage in tactical currency trades should these opportunities present themselves.
The constant inflow of funds, as the Prudential Fund has grown from R33m to R321m has meant that our replication of the GOVI Index has not always been exact. However, volatility in the underlying market has provided trading opportunities which we have tried to maximize.
The question we are most often asked at the moment is, when do we expect to move back into equities? The short answer is, we don’t know! We rely on our in-house proprietary indicators that eliminate emotional bias from the decision making process to direct that move, but we will be certain to communicate that when it happens.