LET’S TALK ABOUT RISK, BABY
Reuben Beelders – Chief Investment Officer
Megan Fraser – Head: Marketing & Distribution
October 2021
The term ‘risk’, like the term ‘best-seller’, requires some context. If, like me, you have wondered how there can be so many ‘best-selling’ books about, what is the credibility of the term? Is it ‘best’ as in good-better-best, or ‘best’ as in any enthusiastic kid’s statement, ‘you’re just the best!’? For easy reference, a book is considered a best seller in SA if it sells more than 5 000 copies. In the US to make it onto a best-seller list, any best-seller list, you have to sell at least 5,000 books in a week, or maybe 10,000. Beyond that, things get complicated depending on which list you’re looking to end up on.
But, back to risk. When investing, any conscientious investor will take RISK into account. How do we define risk for ourselves? If I use the analogy of speed, I consider 120kph to be fast but not everyone does – even the traffic department has different levels of speed considered acceptable.
When considering investment risk, simplistically there are three pillars that should be taken into account, namely volatility, liquidity and inflation. Briefly, volatility is usually the proxy for risk and refers to the rising and falling of asset prices, liquidity is being able to access your funds easily when you need them, and inflation is preserving the buying power of your money. So, when taking risk into account, all three factors should be considered.
Gryphon’s multi asset funds are designed to manage all three of these pillars of risk for investors.
These funds are focussed on generating long-term inflation-beating returns. This is done with the preservation of capital always a primary consideration. The major driver of returns is asset allocation i.e. delivered by moving between asset classes – equity, bonds and cash.
In October 2019, we wrote an article for our investors titled Tortoises and Hares are Investors Too, in which we illustrate the importance of not losing capital.
The article opens with Warren Buffet’s “investing rules”: “Rule 1, never lose money. Rule 2, never forget rule No. 1”.
So, having established that capital preservation is a primary concern for us, it does not mean that we will never lose money; it does mean that we will always consider prospective returns against the associated risk(s) in making an investment decision (i.e. focus on risk-adjusted return).
Below is a table comparing the performance of our two multi-asset funds, Gryphon Prudential Fund and Gryphon Flexible Fund, against the returns of the major local asset classes over a rolling 12 month period:
The green highlighted blocks are the “winners” in each category, the red blocks are the “losers”.
At the risk of stating the obvious, it’s notable that neither of our funds are “losers” on any of these metrics.
Also notable is that our “minimum return” is consistently higher than that of equities and bonds, i.e. the competing risky assets.
This storyline is what results in superior “above” average returns over time.
The graph below illustrates the returns enjoyed by an investor in the Prudential Fund since inception in relation to the underlying individual asset classes over this period, as well as the average of the Multi Asset High Equity category.
In effect, you can see the value “added” by our asset allocation decisions.
Therefore, despite the somewhat muted “upside” of the funds, it is apparent that the focus on downside protection (or net asset value preservation) undoubtedly adds value to our investors over the medium- to longer-term.
A final comment in conclusion, any offer of risk-free investing should be met with scepticism – just as with delicious fat-free or sugar-free offerings there is always consequence albeit it hidden or less obvious. Equities, bonds and cash all have risk attached – the important thing is to recognise and manage these risks.
We’re just not interested in taking a substantial chance of taking a lot of very decent people back to “Go” just so we can have one more zero on our net worth.
~Charlie Munger
