ASSET ALLOCATION IS IN; STOCK SELECTION IS OUT!
Updated: Mar 12, 2020
According to research studies and related publications circulated globally, we are seeing the rise of indexation, and its advantages are beyond dispute. This “passive” approach to securing asset exposure is, in effect, a tacit admission by the asset management industry that markets are efficient and that only a small percentage of asset managers are able to beat asset class benchmarks. We’ve written extensively on how hard it is to successfully choose the next outperforming fund in a certain asset class, and we conclude that a successful selection is based on luck.
For the period ending 31 July 2018, the 5-year performance of funds in the General Equity Sector of RSA indicates that indexation is the most logical choice to make when seeking equity market exposure. This is due to lower fees and not pursuing stock selection which can be destructive:
Black bar: FTSE / JSE All Share Index Total Return
Red bars: Funds that underperformed
Green bars: Outperforming funds Purple bar: Index fund – Gryphon All Share Tracker
Gryphon is of the opinion that markets are efficient and spending resources on stock selection is not the most effective allocation of time and money. We believe that asset allocation should enjoy much higher priority than stock selection even though the equity market is the best performing asset class over the longer term. By spending more resources on asset allocation, substantial value can be added by avoiding the primary cycle drawdowns. We tend to ignore the secondary cycles as these can be difficult to forecast. In the graph below we indicate the primary & secondary cycles:
Primary cycle drawdowns
We currently appear to be in a period where secondary drawdowns are a daily occurrence, but our long-term indicators still pointing upwards. We therefore remain bullish on equities. By indexing equity market exposure (and other asset allocation) we’ve managed to outperform our peers in our multi asset funds. Pay attention to the “Return Percentage Rank” where Gryphon’s Prudential Fund of Funds is consistently top of the class:
Few of our competitors make use of low cost indexation-based exposure to asset classes and yet, for the reasons mentioned above, it makes sense to do so. Our process is unique and, by not paying excessive fees to active managers that rarely consistently and predictably get their underlying picks right in an asset class sector, we will continue to set the pace ahead of the herd.
CL Treurnicht – Portfolio Manager
Gryphon Asset Management