Multi Asset Fund Update: February 2022
Abri du Plessis & Reuben Beelders
In a year that started with mourning the death of our beloved Arch, fire in our Parliament building, a literal attack on the Constitutional Court and the last laugh for Betty White, it’s no wonder if you are already stressed out.
Markets have done nothing to calm the mania inspired by fear and greed and viruses, and we are not immune to this. Our multi asset funds are again attracting attention; not least because of their short-term relative performance while, perhaps ironically, being awarded two *Raging Bull Awards which are based on risk-adjusted performance.
These are some of the questions that we have fielded:
- You exited equities a while back and seem to have ‘missed’ the latest equity run – how has this impacted on investors’ performance?
We moved out of equities at the end of August 2018, manifesting our need to protect the fund from market volatility. From that point to end December 2021, the fund delivered 10.9% p.a. This matches the 10.9% delivered by equities over this same period, the difference being that the equity return came with much greater volatility. The annualised cash return over the same period was 5.7%; we clearly outperformed cash.
Our performance was the result of preserving capital during the cumulative market drawdown of 21% triggered by the COVID19 crisis in February/March 2020, and then by taking advantage of the attractive yields delivered by SA government bonds bought when South Africa was downgraded by international rating agencies. Furthermore, the portfolio manager was able to take advantage of weakness in the currency and allocate funds to international cash.
Being out of equities does not mean just sitting idly by in an anaemic money market account – the outperformance the funds’ achieved is the result of making the cash ‘sweat’.
It’s the deliberate timing of these asset allocation decisions that has resulted in the protection of investors’ wealth that ultimately leads to longer term inflation-beating returns; this rules-based approach allows us to take the emotion out of managing money.
- Have you moved back into equities at all since the move out in August 2018?
The short answer is no.
During our sojourn from equities there have been a number of drawdowns in the market, the most significant being the February/March period of 2020 when the market suffered a cumulative drawdown of 21.4%. Over this time our funds returned over +7%.
But…being out of equities and invested in ‘cash’ is not Nirvana either:
- We are the first to acknowledge that cash will not protect against inflation if inflation exceeds the yield on cash; equities are therefore the long-term asset class of choice.
- However, when equities reach really stretched levels, there is the likelihood of a drawdown or sub-par returns for an extended period of time. Think of the US in the 1970’s as an example.
- Despite some upward moves in markets, our indicators have not yet signalled a shift into equities; they still do not indicate a sustainable boom in world economies to support expensive equity markets.
- How do you explain your asset allocation approach?
Gryphon’s investment philosophy purports that, in an efficient market like ours, as well as in large portfolios, value is added more reliably and consistently through asset allocation rather than stock selection.
Historically, equities has been the asset class of choice, the class most likely to deliver inflation-beating returns. That said, our philosophy maintains that there is a time to be out of equities, to protect capital either in cash or other safe haven assets until it is time to get back into the market.
We are fundamentally agnostic as to a preferred asset class and believe there is a time for each. This is a major contributing factor to our respectable risk-adjusted returns.
Our asset allocation decisions are informed by a series of historic, data-based indicators that identify the various economic, business and investment cycles. Distinction is made between primary and secondary cycles; we’ve learned that it is possible to call the primary market cycles reasonably consistently. Although it may also be possible to read the secondary market cycles, we have not yet been able to identify reliable factors that consistently predict secondary cycles accurately.
We believe in committing fully to whichever asset class offers most relative value; this means we will either be 100% exposed to equities or hold no equities at all. When our indicators signal value in the market, (i.e. a bull market), we will be 100% invested in equities; if, however, our indicators signal a need for caution, (i.e. a bear market) we protect investors’ capital and hold zero equities.
Our approach to asset allocation is primarily the process of assessing prospective risk-adjusted real returns. We invest in the asset class that we believe will give our investors the most likelihood of risk-adjusted real returns. To this end, prospective downside returns are considered constantly.
- Do you expect to make changes to your asset allocation in the foreseeable future?
Our indicators signal high levels of risk in the market at the moment – this suggests an inflection point in the current cycle and, if this is indeed so, all risk assets will be affected. While some local assets are actually quite cheap, developed markets assets are not and all risk assets usually get tarred with the same brush. Historically, when asset classes have traded at the levels we see currently, subsequent returns have been below par and/or very volatile.
Because of our focus on the protection of capital, our preference is thus to remain de-risked and out of equities for now. While mindful that cash is a low-yielding asset, it does offer investors downside protection and also means that we keep our powder dry and are able to take advantage of opportunities which can appear suddenly in volatile markets like these.
Currently we are invested in local cash (60%), offshore cash (Swiss Franc – 30%) – and precious metals (gold – 10 %).
- How do you define and approach risk?
We have recently written a piece that details our approach to risk – you can find it here.
There is, however, a specific risk that we’d like to raise for investors; the risk of timing.
In the first half of 2021, the Gryphon multi asset funds really stood out. This was simply the result of their not being invested in equities at a time when markets were plummeting and most of our peers had meaningful holdings in equity. This outperformance attracted a great deal of attention…and a lot of new investors.
Being out of equities provided protection for investors during extreme volatility – that’s a win. However, the corollary is, the fund is still out of equities and the market has run hard. That hurts…on a relative basis. Some points for consideration;
- As a result of the market fall in 2020, our peers were coming off a very low base. Given our starting point, it’s rational that our one year performance would appear to lag.
- It’s critical for investors to understand the mechanics of the fund; why it delivers the performance that it does and what to expect of it going forward.
- The fund is very likely to deliver uncorrelated performance; it is possible that we will zig when others are zagging, particularly when we are out of equities (remember, when we are out of equities that means zero equities).
Our focus is unashamedly on beating our benchmarks over a rolling three year period; we bear the discomfit in the short-term that might result from protecting clients’ capital in risky phases of the market cycle, for the benefit of the longer-term rewards. We gladly offer detailed insight into the workings of the multi asset funds – the philosophy and process are simple…but that does not mean it’s an easy ride. Having the courage and fortitude to implement this strategy in a disciplined manner is perhaps the most challenging aspect for the fund manager. Read more here…
In conclusion, Warren Buffet has two rules to investing: (1) Don’t lose money, (2) never forget the first rule. We take this tenet very seriously and are convinced that our investors are the better off for it!
It would be remiss of us not to take the opportunity to quote The Arch:
“Do your little bit of good where you are; it’s those little bits of good put together that overwhelm the world.” ~ Desmond Tutu
*Gryphon Prudential Fund has just been awarded:
- Certificate for Top Risk-adjusted Performance over 5 years to 31 Dec 2021: Best South African Multi-Asset High-equity Fund
- Raging Bull Award (Trophy) for Top Risk-adjusted Performance over 5 years to 31 Dec 2021: Best South African Multi-Asset Equity Fund