QUICK REVIEW OF THE MULTI ASSET FUNDS:
The multi asset funds’ investment universe includes all global asset classes subject to prevailing regulatory limitations; currently a maximum of 30% of the portfolio may be invested offshore. Underlying investment holdings are indexed – Gryphon does not practice active stock selection. The Prudential Fund complies with regulation 28 of the Pension Fund Act.
Although equities is the asset class of choice over the longer-term, the funds have held no equities since August 2018. Despite this, as at the end of January 2021, the Prudential Fund returned an annualized 11.79% over the last three years while the Flexible Fund returned 11.22%. That means that both funds have beaten their benchmarks, CPI + 5% and CPI + 7% respectively, over the last three years. Furthermore, the Prudential Fund was awarded a Raging Bull Certificate for Best South African Multi-Asset High Equity Fund on a Risk-Adjusted Basis over 5 years.
The performance since August 2018 was the result of exposure to SA Government bonds and movements in cash currency. It is worth noting that our exposure to equities over the life of the funds to-date has been for a shorter period than we would have expected. Having said that the long-term asset class of choice for achieving inflation-beating returns is equities, equity exposure for only 18 of the 81 months of the fund’s existence is not what we would have foreseen. The actual asset allocation, however, has been the result of the over-valuation of equities as an asset class. Once value is restored to equities, it is our view that our exposure to equities will extend for longer periods of time and outperformance of the benchmark is likely to be significant.
At the moment we find ourselves in a similar position to that of August 2018, in that equities are strong and general prospects for the global growth are considered to be good based on consensus forecasts. However, our caution now, as then, is simply that financial markets have already priced in this prospective growth.
WHEN DO WE SEE OURSELVES GETTING BACK INTO EQUITIES?
Our primary buy signal does not currently suggest an adjustment to our current asset allocation, i.e. based on the various, data-based indicators, we are not anticipating a shift back into equities yet. We believe that there needs to be a fair amount of inversion in the yield curve before this is likely to occur, i.e. closing of the yield gap. That being said, we would caution that there have been times in the past when this inversion has happened very quickly; should this situation arise, our allocation into equities will be swift. (Because our exposure to equities is indexed, we can accomplish a move like this within a day. A key advantage of indexation is the liquidity that it offers which enables us to be bold.)
Equity markets have rallied globally in 2021 as unprecedented monetary stimulus measures from central banks and governments around the world pushed markets to record highs. The JSE All Share Index has marched from one all-time high to the next so far in 2021, pushing the index to above 66,000 points.
For equities and commodities to continue to grow, the world economy needs sustainable growth. Even with the enormous quantitative easing and fiscal packages expected, the world economy is going to struggle to get to its pre-COVID level. Commodity and equity markets are already higher than before COVID. This, in our view, reflects exuberance.
We believe that China remains a critical input in determining the demand for commodities and this demand is very closely linked to its money supply.
Below please find two charts. The first displaying the annual percentage change in the M1 Money Supply for China relative to the Economists Metals Index and the second displaying the annual percentage change in M2 Money Supply for China and the CRB Commodity Index.
Please note how the growth in money supply in China resulted in the spike in commodity prices in 2010 – 2011.
The current muted increase in the Chinese Money Supply leads us to conclude that much of the increase in commodity prices is a function of firstly supply constraints (e.g. Brazil for iron ore) and too much cash (as result of QE) chasing too few assets.
WHERE CAN PERFORMANCE BE FOUND OUTSIDE OF EQUITIES?
Gryphon is of the view that, from current levels, the returns offered by asset classes other than equities offer better value than the risk-adjusted return from equities.
The yield of more than 8.5% offered by SA’s 2030 government bond compares with 10-year US Treasury yields of just around 1.30% while 10-year UK gilts yield just 0.5%. Switzerland’s 10-year yield is currently minus 0.30%, which effectively means savers are being penalized for lending money to the government.
SA’s yield advantage has already lured foreign investors back to the local market prompting them to purchase a net R11.3bn of bonds so far this year after they dumped almost R40bn of the securities in 2020.
Abri du Plessis
Chief Investment Officer