Updated version: Unpacking Gryphon’s Proprietary Indicators
Abri du Plessis – Portfolio Manager
GRYPHON’S MULTI ASSET FUNDS landed in the investment world like Pravin Gordhan at Des van Rooyen’s inauguration event – not everyone is pleased but life will not be the same again. Holding and practicing an alternate philosophy is never easy, regardless of the practice – vegetarianism, Rastafarianism, home-schooling-ism. But when your practice is in an environment of highly intelligent, highly qualified, erudite, passionate investment specialists, you are very mindful of the scepticism.
Fortunately, the Gryphon investments specialists are right up there with the best of them…and have been around for more than their fair share of market volatility and they are not easily rattled.
Over a period of twenty something years this team has identified a number of historic, data-based indicators that assist in signalling the appropriate time to get into equities, or to get out of equities and into cash/low risk options. These indicators are based on, among other things, the business/economic cycle, commodity prices, company earnings, interest rates and inflation.
The important bits to understand:
- There is a distinction between primary and secondary cycles. (More can be learned about this here: Can markets be timed (or the cost of FOMO)).
- No forecasting or expectations are taken into consideration by the investment team. They adhere very strictly to these indicators when implementing any changes to asset allocation.
- Equities are considered the asset class of choice, most likely to preserve investors’ wealth against inflation…but there is a time to be out of equities and to wait in cash or other safe haven assets until it is time to get back into the market. We are agnostic as to a preferred asset class and believe there is a time for each. (More can be learned about this here: Waiting for the lights to change).
- This fund challenges convention in the extreme in that if it is time for equities, it holds maximum equities (i.e. 100%); if it is not, it holds zero The idea is that this fund behaves as a ballast to a core/satellite portfolio – to hold this fund as a core investment and then choose satellites of a preferred active managers to optimise equity exposure and generate alpha.
- Finally, exposure is via trackers only – it is our belief that more value is added by asset allocation than by stock selection (more about that here: A rising tide lifts all boats).
…AND SO TO THE INDICATORS:
There may appear to be a veil of mystery created around these indicators. Obviously, there is the intellectual capital element to consider but we have come to the realisation that the discipline and fortitude required to implement this strategy is challenging in and of itself, and this makes the approach very difficult to replicate.
THE SELL/BEAR INDICATOR:
The father of Modern Economics, Adam Smith, said: “Markets go in cycles, just like all rhythms in life.” Economic activity moves in upward and downward cycles, commonly called the business cycle. Company earnings follow this cycle closely. In turn, company earnings drive share prices. And this is what drives the ‘Gryphon Sell Indicator’. In the graph below, the red line is the SA All Share price graph/index. The purple line is real SA All Share earnings growth. Look at what happens to share prices every time real share earnings growth turn negative – a bear market follows. (A bear market being defined as a drawdown greater than 20%). It’s that simple.
THE BUY/BULL INDICATOR:
Interest rates reveal a lot of information about the business cycle and inflation expectations. It is common knowledge that the interest rate yield curve, long term rates minus short term rates, also follows the same cycle as the economy. A positive yield curve indicates positive economic and company earnings growth. These relationships drive the Gryphon Bull Market Indicator as can be seen in the graph below. The purple line is the SA yield curve. The yield curve turns positive close to the bottom of share price bear markets. It is that simple.
It is simple…but it’s not easy.
If the process is that simple, you may ask why we are prepared to share it and why doesn’t everyone just do that? The challenge is being disciplined and focussed enough to be able to ignore the noise and the emotions caused by fear and greed, the FOMO that comes as a result of constant comparing and competing. The disciplined implementation part is the toughest part to replicate.
However, it has become quite apparent that the Gryphon multi asset funds are shaking up the status quo. The chart below illustrates how Gryphon’s multi asset funds have outperformed the underlying asset classes:
Source: Profile media, FE Analytics
31 December 2021
In conclusion, the principles behind the multi asset funds have proven to be worth serious consideration. The funds have established a credible and impressive track record of nearly eight years and the benefits of having an investment approach that is clearly defined, based on historic data and free from emotion, prediction or forecasts are clearly apparent.
We love sharing our approach and insights – please don’t hesitate to get in touch with us if you’d like to discuss further…and we also have great coffee.
“The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at and repair.”
~ Douglas Adams