Abri du Plessis  – Portfolio Manager

Reuben Beelders – Chief Investment Officer

July 2022

Gryphon’s investment philosophy is based on a few simple tenets:

  • The greatest threats to investment returns are costs and emotions;
  • Greater value is added by asset allocation than by stock selection;
  • Asset allocation should be active, dynamic and meaningful – it should expose investors to the asset class offering the best prospective risk-adjusted return;
  • Preservation of capital is paramount.

The Gryphon multi asset funds, launched in 2014, are testimony to this approach. Having attained a credible track record, the funds have delivered consistent, predictable, inflation-beating returns. As mentioned above emotion should be kept out of the decision-making process. This prevents investors getting caught up in the “excitement and heady euphoria” of a frothy market and allows them to wait, clear-headed and sober, for sustainable opportunities.

The asset class shifts in these funds are signalled by data-based indicators using historic economic and market data – no forecasts. The data elements that inform these indicators include: business/economic cycles, commodity prices, company earnings, interest rates, and inflation.

These indicators triggered an exit from South African equities in August 2018,  The following charts give texture and depth to the data and we can now, with the benefit of hindsight, review what they were telling us with a greater appreciation and perspicacity.

Our exit from SA equities was confirmed by the Gryphon US Bear Market Indicator with a ‘sell’ triggered in US equities mid-2021.

Historically, the dollar has been inversely related to commodity prices. We see the dollar as a safe-haven currency and its strength from 2021 served to confirm our view that the commodity price rally was driven by supply issues rather than underlying demand.

The weakening of the US ISM from August 2021 supported concerns about the high commodity prices mentioned above.

Maersk, one of the largest shipping lines in the world, issues quarterly financial results.

An analysis of these results revealed to us stagnant or falling volumes with freight prices driving the growth in turnover. This supported our view that supply-side pressure was responsible for elevated commodity prices.

More recently, the following indicators have served to confirm our caution:

More recently, the following indicators have served to confirm our caution:

The US yield curve is now calling a recession. In the past, the spread between the U.S. 10-year bond yield and the 2-year bond yield has been a harbinger of impending recession. We used this as a secondary indicator because intervention by Central Banks in the bond market (via Quantitative Easing) has impacted bond pricing. With the winding down of QE and the beginning of Quantitative Tightening, we consider it prudent to pay attention to the signals provided by the bond market.

The shaded areas of this chart of the US Unemployment Rate indicate periods of recession.  What is evident is how often current employment levels are followed closely by a recession.

We remain concerned about the valuation of equities;  a number of indicators suggest that the stellar post-COVID19 growth in earnings, particularly internationally, is coming to an end, as illustrated in the charts below:

While some investors hold onto the view that China will once again rescue global growth as it did when they reflated their economy in 2010/11, we are less sanguine in this regard. It is our view that China’s growth composition has markedly changed since then – it’s become more weighted to services – and so its ability to support commodity prices, and thus global growth, is limited. An additional concern for us is China’s current debt levels – these are significantly higher than they were at that earlier point in time.

Finally, our caution regarding international assets extends to local assets. South Africa remains a liquid,tradeable market and we are not likely to remain unaffected by a drawdown in global markets.

As seen in this  graph below, the JSE All Share in dollars is closely correlated to the copper price. The copper price has been a reliable yardstick of the broad commodity complex and we believe that recent weakness in the copper price will soon be reflected across most commodities.

Although of shorter duration, the graph below supports the close relationship between the ZAR (right-axis inverted) and the copper price.

Weakness in the ZAR confirms our concern about commodity prices.

With the benefit of hindsight, we can appreciate just how well our data-based indicators have served us. Our exit from equities has resulted in investor’s enjoying a risk-adjusted return that was in no way compromised by not holding equities; the fund has out-performed all underlying asset classes. Our rules-based approach has placed us in the best asset class for current market conditions, to await with equanimity the opportunities that will no doubt present at the proper time.