Reuben Beelders, Chief Investment Officer
Megan Fraser, Head: Sales & Marketing
Gryphon’s multi-asset funds launched in April 2014 and now, having a credible track record, we invite you into the kitchen as we reflect on their delivery.
As stated in Freakanomics’ Folly of Prediction, ‘Human beings love to predict the future, but we’re quite terrible at it.’ In recognition of this truism, our philosophy is based on the premise that historic market data holds the ‘DNA’ needed to signal the optimal asset allocation for investors wanting to earn the best risk-adjusted return.
And so it is that we do not make predictions; this is just as well because below is a list of recent events that we neglected to foresee and thus took us by surprise:
- COVID19 – while we weren’t alone on this one, the duration of the pandemic and its continued impact exceeded our expectations.
- Even more surprising to us was the deluge of quantitative easing that flooded the world by Central Bankers.
- The surge in commodity prices – we recognised the “supply shock” characterised by COVID19; we did not anticipate the protracted duration and relentless impact it would have on global economies, resulting in commodity prices remaining higher for longer. This, despite that fact that we are acutely focussed on commodity prices; they are critical to what informs our view on the world, and South Africa in particular.
- The Russian invasion of Ukraine – geopolitical events are especially difficult to predict; as it stands today, there are an increasing number of stress points across the globe.
- The local currency since the inception of the funds – neither the weak local currency in the early years of the funds nor the more recent strong Rand was anticipated. With the benefit of hindsight, the recently strong Rand was the adjunct of strong commodity prices, but we certainly did not anticipate the degree or duration of the strength it ultimately held. This clearly had a positive impact on South Africa’s “balance sheet”. Having said that, we had no expectation that prices would linger at the elevated levels.
- The return of inflation – recent strong commodity prices coupled with supply pressures led to inflation rising across the globe. There is a generation of investors currently in the market for whom inflation is like polio – intriguing in theory but relegated to history. While inflation in isolation is hazardous for stock valuations, many of this generation have, throughout the course of their investing career, never experienced a bear market. The last drawdown in global markets was 2008 / 2009. Anyone who subsequently became a professional investor only knows the mantra “buy the dips”. It’s the last one that truly hurts.
So, where does this leave us:
We hypothesise that much of what we failed to anticipate was the result of the abundance of “easy money” offered by quantitative easing as well as low interest rates enabled by Central Banks across the globe for the past decades.
While these factors may have fed on each other, we also believe that the world allowed itself to get into a position where it was ill-equipped to deal with the inevitable slowdown in economic activity; “kicking the can down the road” was the go-to solution for most economic and financial ills.
Well, it appears we’ve run out of road…and now what?
Being the first to acknowledge that we really are ‘quite terrible’ at predicting the future, it’s just as well we don’t keep trying to get it right. However, we do persist with what we know we can do, and that is to uphold a rational, established investment philosophy which is grounded in protecting investors’ capital. The circumstances listed above have resulted in extreme market volatility. Our investment philosophy precluded us buying a ticket for the ride and so, while we did not suffer the gut-wrenching declines, it also meant that we did not participate in the dizzying heights that equity holders enjoyed…briefly. We’ve simply continued to deliver consistent, predictable returns.
Now a brief segue to a book called The Art of War written by Sun Tzu. This book was written over 2000 years ago during a period of prolonged civil warfare. Taking a rational rather than emotional approach to the problem of conflict, Sun Tzu showed how understanding conflict can lead not only to its resolution but even to its avoidance altogether. The insights offered by this ancient wisdom offer context to Gryphon’s investment philosophy. At the risk of arrogance, we offer this intelligence to provide succour for the patience and trust required to remain steadfast when circumstances are beyond challenging. These philosophical insights also underscore the importance of preparation over reaction.
In ancient times, those who governed well did not arm, those who were armed well did not set up battle lines, those who set up battle lines well did not fight, those who fought well did not lose, those who lost well did not perish.
It is the unemotional, reserved, calm, detached warrior who wins, not the hothead seeking vengeance and not the ambitious seeker of fortune.
Investors in Gryphon’s multi asset funds are best served by having a clear understanding of, and confidence in, our philosophy. Most notably, and a significant differentiator, the funds will either be fully exposed to equities or will hold no equities at all, depending on market conditions. The funds exited equities in August of 2018 and while they’ve remained ‘equity-free’ since, they did take on additional risk in April 2020 in the form of bonds, which were held for just over 12 months.
There have been good days and there have been difficult days but remaining true to our philosophy is the only life-line, the only certainty, that we can offer investors. The secret ingredient is time – given the space to allow this philosophy to manifest is made more difficult if one is constantly comparing it to other funds; it’s like buying an Android phone and constantly evaluating how it performs compared to an iPhone – the only certainty is distress and frustration. Relative rankings should be served with large doses of anti-nausea medication: as at end April 2022, the Gryphon Prudential Fund ranks 7/160 over 5 years, 160/198 over one year, and 3/201 over three months. This is not reflective of volatile performance of the fund, more that we tend to be the fulcrum around which our peers swivel. For the investor who draws comfort from relative rankings, this fund will undoubtedly cause anxiety; for the investor who understands that inflation-beating returns are best achieved by protecting capital, welcome aboard – no seatbelt required.
We remain fully invested in local and international cash, 55% and 45% respectively. Albeit that the wisdom of the ages is perpetually appropriate, there two contemporary quotes by Warren Buffet which are integral to our investment process:
- There are two rules in investing, the first rule is not to lose money; the second rule is not to forget the first rule.
- Be fearful when others are greedy and be greedy when others are fearful.
For some time now, our view has been that this wisdom is best served by being in cash – our investor’s wealth is protected but, when opportunity presents itself, we will respond with alacrity.
In conclusion, a final quotation from Sun Tzu,
“Seeing what others do not see is called brilliance, knowing what others do not know is called genius.”
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 does not follow the road most travelled and the view is not always clear at the time. But allow time and the view will come into focus and your trust and patience will be rewarded.