19 MARCH 2020
How do you catch a falling knife? The short answer is – carefully! With the mayhem and chaos ruling the markets and beyond, investors are battered and bruised and looking for a safe haven in the storm, or some guidance at the very least. While there may be an appreciation for Gryphon’s philosophy and the resultant circumstance, many other investors who have suffered the drawdown of the past few weeks have been asking us two questions predominantly:
1. Do we just stay where we are invested currently and sit out the storm; OR
2. Given that we have taken the pain of the fall already, we’ve paid our school fees, is there any reason to switch to the Gryphon funds now?
The intention of this article is to give some perspective on what has happened and what some options are for investors going forward.
Let’s start by being very clear on how dramatic this fall off has been:
Let’s also be very clear on why Gryphon’s funds are attracting renewed attention.
The graph below shows how the Gryphon multi asset funds held up against their peers during the market fall.
So now what??
As at the 16th of January 2020 most funds were broadly invested and positioned for a growing global economy, a risk-on* environment, and had been delivering respectable performance to this point. These portfolios would have been caught up in the market tumble and will have experienced significant losses.
In this situation, we would suggest three possible scenarios as options going forward:
- Conceivably fund managers who were positioned for this risk-on scenario used the draw down to increase exposure to their existing positions i.e. bought up stocks at lower prices and they will be holding even more equity than before. In this scenario, the investor will now be even more aggressively exposed to a risk-on environment. While this additional equity may have been bought at lower prices, it doesn’t change the fact that the portfolio’s risk-on position is now more extreme, and this investor should have an appetite for considerable risk.
- Alternatively, these portfolio managers may have adjusted their convictions and have begun transitioning their portfolios to a risk-off* environment? For the investor whose fund manager used the draw down in the market to reduce exposure to the risk-on trade, it is probable that the costs associated with this move have been substantial. Risk-on shares were heavily discounted by the market, while more defensive stocks were marked up in price. The fund manager therefore sold ‘cheap’ and bought ‘expensive’, i.e. bought high, sold low. So while it is quite possible that the portfolio is now appropriately positioned for changed circumstances, there is a good chance that this portfolio will battle to outperform into the future. We would also caution that if a fund manager failed to prepare for the market dislocation and only acted with hindsight, there is a high probability that this same type of mistake would be made in the future.
- Finally, there may be those fund managers who, because of the size of their funds or due to active choice, have elected to do nothing and have simply sat through the volatility of the past few days. Their investors are therefore exposed to the same risk-on trade, but it is now a far smaller component of their portfolio and as such, must perform very strongly in order to achieve overall portfolio out-performance.
So how does this compare to where the Gryphon investors are now?
Or, more importantly, why should an investor consider moving decimated portfolios out of their current portfolios and into the Gryphon multi asset funds?
- Our investors have enjoyed a cash return over the past two months.
- They have not been exposed to equities which suffered a -34% draw down at time of writing; instead they gained around 5.5% during this time.
- While it might seem banal to declare, critically we are not under pressure to perform.
- We are not distracted by anxious, angry, frantic investors.
- We are spending 100% of our time assessing markets and determining whether equities are offering value.
- Should equities continue to fall, our investors have no concerns because cash is our safe haven.
- Should equities trend sideways for a considerable period of time, our investors have the assurance that the underlying value of their investment will not experience any volatility and we can comfortably facilitate redemptions.
- While equity markets continue to bounce about, our investors will continue to earn a cash return.
- Should underlying economic conditions change and prospective returns improve, we have identified and successfully applied indicators that signal when markets present the opportunity to enter at prices which are likely to ensure our clients an inflation-beating risk-adjusted prospective return.
- We would caution investors that we may not “buy the bounce” – we will not make the move into equities unless we believe it is a sustainable move.
Some observations we’d like to share:
- Now, more than ever, we passionately advocate that prudent asset management is not just about seeking yield, but also capital protection. While many managers have been hanging on for an additional 2-3% yield, clients have now lost substantial parts of their portfolios as a consequence.
- It is important to realise that at no stage did Gryphon have any information that the market did not also have before the crash. All that differed was what we chose to do with the available information, and that was to respond differently to the herd.
In closing, some enduring wisdom:
~ ‘The man who has experienced shipwreck shudders even at a calm sea.’ Ovid
~ ‘Anyone can hold the helm when the sea is calm.’ Publilius Syrus
Please do not hesitate to contact us should you wish to discuss this content in more detail.
Risk-on risk-off is an investment setting in which price behavior responds to and is driven by changes in investor risk tolerance. Risk-on risk-off refers to changes in investment activity in response to global economic patterns.
During periods when risk is perceived as low, the risk-on risk-off theory states that investors tend to engage in higher-risk investments. When risk is perceived to be high, investors have the tendency to gravitate toward lower-risk investments.