Reuben Beelders – Chief Investment Officer
Abri du Plessis – Portfolio Manager
The Gryphon multi asset funds exited equities in August 2018 and from that point have remained equity-free. From this point the Gryphon Prudential Fund has delivered a gross return of 43.9% (10%p.a.) while the market delivered a gross 29.5% (7%p.a.). During this time we have gone from hero to zero and back again a number of times as the market roller-coasted its way forward. We remain committed to the view that two things destroy investor’s wealth: costs and emotions. This is the rationale behind our rules-based approach to investing. Gryphon has a unique approach to asset allocation that relies on a series of data-based indicators. It was these indicators that got us out of equities in August 2018 and kept us out since then. This, despite the fact that equities are our asset class of choice for the delivery of inflation-beating returns.
In a previous article we quoted Sun Tzu who said: “Seeing what others do not see is called brilliance, knowing what others do not know is called genius.”
It is important for investors to understand that we have neither brilliance nor genius. There is nothing we see that others do not see and there is nothing we know that others do not know – we all have access to the same information. What we do have is a philosophy that we trust and hold sacrosanct – it is our commitment to this philosophy that has resulted in our current positioning.
While we’ve came under great pressure at times for being out of the market for as long as we have, we trust that our consistent performance vindicates this decision.
The table below shows how quickly and radically relative rankings change. Our philosophy focuses on the protection of capital and so, even when our relative rankings have lagged, we have very rarely delivered a negative month.
The graph below shows three phases in the life of the Gryphon Prudential Fund thus far. There are some interesting observations to be made when comparing the fund’s delivery to the market and the average of our peers.
- The fund has been invested in equities for only 19 of the 99 months since its inception. This was not what was anticipated when the fund was designed. (As previously mentioned, our asset class of choice is equities for investors wanting to beat inflation.)
- During the time that the fund is invested in equities, it is highly correlated to the ALSI, tracking it more effectively than the average of the peers.
- During the time that the fund has been out of equities, the performance is distinctly uncorrelated to the performance of both the market and the average of our peers.
- Since the ‘COVID correction’ the average of the peers has tracked the path of the index but has not quite delivered the heady returns of the market.
Our investment team have always been quite clear on the exquisite dance of asset allocation – it is a two-step process. Getting out of equities is only half the job; getting the timing right on getting back into equities is just as critical. Again, we rely on our data-based indicators to signal that. As to when this is likely, we don’t know. What we do know is that it can happen quite quickly and so we remain alert and vigilant. Because our current holdings are completely liquid, we can transition immediately and without impediment.
As to our current macro view of the market, below are some points for deliberation:
- The funds remain conservatively positioned with 55% in South African Cash and 30% in Swiss Francs. Recent regulatory changes permit a maximum of 45% to be taken offshore. As a result, we replaced our gold holding (Rand hedge) with USD (15%).
- Prolonged geopolitical instability, lasting longer than expected, has had a knock-on effect for energy commodities resulting in devastating consequences to global growth, particularly in Europe. While our call of a slowdown in economic growth was not consensus in February, it is a view more widely supported today.
- In our view, inaction by Central Banks allowed inflation to rise more than expected. While Global Central Bankers have “front-loaded” interest rate hikes with the intention of getting inflation under control and this may appear to be a bold approach, we believe that it is not enough to compensate for the degree to which the U.S. Federal Reserve, in particular, has allowed itself to get “behind the curve” in its mandate.
- Many investors believe(d) inflation had been vanquished. Our opinion is that it is one of the least predictable and more difficult economic phenomena to control and has a very negative impact on asset prices.
- There are those who believe that the Chinese economy has “hit the bottom” and is likely to recover from here. While this remains a possibility, we maintain that this cannot be relied upon to “rescue” global growth.
- In our view, equity markets were trading at extended valuations in a Goldilocks-period of low-to-negative interest rates, low inflation and ample liquidity. Under these conditions, long-duration assets (i.e. high growth companies projected to grow extensively into the future) had reached unrealistically high prices. All three of those factors have since become headwinds for equity prices.
- Interest rates have risen sharply; this will impact company earnings and, more importantly, the discount rates applied to future cash flows.
- Inflation will increase the volatility of future cash flows resulting in lower price earning ratios for equity markets.
- The Fed is now moving from quantitative easing to quantitative tightening. Although IPO’s and cryptocurrencies were never the core of equity markets, they flourished as a result of easy money, a manifestation of “helicopter money” finding a home.
- The pick-up in commodity prices post-COVID disturbed us because this would usually indicate underlying economic activity. However, our other indicators cautioned us and we reasoned that the pick-up in prices was due to supply issues rather than underlying demand. We maintain this view and have noted the recent pull-back in commodity prices. The impact this has on South Africa’s fiscal position is not encouraging. While this has been our rationale for avoiding local bonds, at current prices they reflect these risks.
- Some may argue that the recent decline in commodity prices heralds lower inflation, and, while this might apply to “goods” inflation, we are concerned that “services” inflation will be harder to bring under control.
- We stated that most of the developed world equity markets were showing signs of earnings topping out after the rapid “V”-shaped recovery on the back of QE and helicopter money. Stimulus packages of this nature cannot be expected to produce sustainable growth. We maintain this view and expect forthcoming earnings releases likely to increasingly reflect this. (We generally find sell-analysts are too optimistic about earnings growth and its sustainability.)
We are firmly of the view that the best asset class for current market conditions is cash, not only because it provides sanctuary to weather the storm, but because it allows an objective assessment of competing asset classes and opportunities and enables us to invest when value presents itself.
Some of our more recent articles remain relevant in reflecting on the current position of our multi asset funds, namely:
Those Who Fought Well Did Not Lose May 2022
Finally, Gryphon’ approach to investing is quite different to the mainstream; we are available and committed to any investor that has the curiosity and courage to consider incorporating our funds into their portfolios. Please let us know if you’d like to arrange an opportunity for us to engage with you at any time.
“You cannot swim for new horizons until you have courage to lose sight of the shore.”
~ William Faulkner