ONE TRICK PONY….OR DARK HORSE?
Chief Investment Officer
BD & Marketing
Is there a line, fine or otherwise, between being consistent and being boring? When your personal wealth is at stake, the label of ‘boring’ is certainly worth bearing if, in being so, the unknown and the unexpected do not decimate your nest egg.
Long-term, inflation-beating returns are in part the result of an ability to consistently generate above-average returns over a period of time – this requires persistence and patience, and a fair degree of fortitude. Combined with protection on the downside, this approach can allow any investor to reasonably expect steady and secure growth.
While the skill of consistency may seem obviously germane to fund management, it is not only in this arena that we expect consistency. Consistency and dependability are the tenets that we as humans seek out. Any keen sports’ supporter expects dependable delivery from both individual players as well as the team as a whole. We have the expression, ‘he’s just not himself’ when someone behaves out of character. We consider ‘dependable, service delivery’ worthy of awards.
Yet, paradoxically, we abhor the notion of being labelled as predictable or boring. The Zelda Fitzgerald quote `She was never bored mainly because she was never boring' (that inspired the Pet Shop Boys hit song) describes our aversion to being classified as dull. It could be this intellectual aversion to the humdrum and banal that makes active fund management so appealing – it allows for lucky breaks, (un)predicted success stories and the exciting discovery of gems…[much like any casino].
Getting back to the mundanity of fund management, an investor should be critical in their evaluation of the ‘where/how/when’ of a fund’s performance. A ‘flash in the pan’ or opportunistic circumstance resulting in an uptick in performance cannot necessarily be expected to be sustainable or repeated i.e. the question that needs to be asked is, ‘can this current performance be replicated?’
The performance of our multi asset funds (Gryphon Prudential Fund & Gryphon Flexible Fund) has attracted much attention in the last 6 months. This has given us cause to reflect on the funds’ delivery thus far and then also to consider how they should be expected to perform going forward; is the current performance data an anomaly (perhaps as a result of exiting equities when we did) or can one reasonably expect the fund to sustain these returns going forward?
Part of the reason for this navel-gazing is our concern that investors choose to invest in these funds due to their rankings in the performance tables. This would be utterly contrary to the objective of the funds – they do not seek to out-perform peers, but rather to simply preserve capital and consistently beat inflation. Over a period of time this brings its own rewards. The corollary to this is that there may be periods where the funds do not shine brightly in the ranking tables…and this should not necessarily give rise to concern. This situation could be expected to occur if the funds are not invested in equities and the markets have a bit of a rally; performance may appear to lag over the shorter-term – but the objective is being met –capital is being protected.
This reflection inspired two questions:
1. Have we shown the ability to deliver consistent inflation-beating performance over time?
2. Have we demonstrated the ability to preserve wealth in times of market volatility, i.e. provide some measure of “downside protection”?
In answering these questions, we compared the performance of the Gryphon Prudential Fund to the average of the other funds in the same ASISA category, i.e. the Multi-Asset High Equity category, as well as to the JSE All Share Total Return Index. As illustrated in the chart below, the Gryphon fund has delivered stellar performance since inception.
Historically, equities have been the asset class expected to deliver long-term, inflation-beating returns. However, there have been notable periods where returns from equities have been quite muted; the past six or so years have been just such a period. As a result of this, investors would have benefited greatly from a skilled asset allocator in order to generate returns in such an environment.
To better evaluate the funds’ performance, we divided the performance of the fund into three distinct periods; the initial period post launch when the funds were not invested in equities (1st of April 2014 to 9th February 2017); the second period during which they were fully invested in (indexed) equities (9th February 2017 to 28th August 2018); and the latter period following the equity sell off (28th August 2018 to 31st October 2020).
The rationale behind this was to critically evaluate the performance in these specific periods in order to identify whether there was any obvious lag in performance or flaw in the expected delivery.
PERIOD 1: 1st of April 2014 to 9th February 2017
At the time of launch, based on our data-based indicators, the risk-adjusted return offered by equities did not warrant investment, and as a result the fund was invested predominantly in local and international cash for this period.
The graph below illustrates the volatility of the market, with the FTSE/JSE ALSI providing quite a tumultuous ride for investors; notice how closely the All Share Index is mirrored by the average of our peers in the same ASISA multi asset category. Investors in the Gryphon multi asset funds earned a relatively risk-free return in cash as other asset classes presented a more uncertain outcome.
PERIOD 2: 9th February 2017 to 28th August 2018:
During this next period, the funds were exposed to equities, (the Prudential Fund being 75% in equities according to Regulation 28 limits and Flexible being 100% exposed) and some local and international cash. This was as a result of the signals from our data-based indicators that equities could be expected to perform better than other asset classes. We therefore allocated the maximum allowable exposure to this asset class which would result in a return of 17.73% over the next 18 months.
PERIOD 3: 28th August 2018 to 31st October 2020:
Our sell-indicator (the ‘get out of equities free’ card) was triggered and on the 28th of August 2018 the funds sold all equity exposure and asset class exposure was to local cash, international cash and, from mid-April 2020, local bonds. While some naysayers have called our avoiding the March 2020 crash lucky, we maintain that we had no insight, expectation or prediction of the COVID-19 situation; from our perspective the obvious alternative narrative was that equities were facing numerous headwinds which we considered made them more vulnerable than usual.
What is clearly evident over all three identified periods is the undeniable ability of the fund to not just beat inflation but also to add value over that of the average fund in the Multi-Asset High Equity space and the JSE All Share Total Return index.
For a snapshot perspective, have a look at the table below – the value of avoiding the volatility of equities becomes glaringly obvious:
Although our philosophy is one of being “competitor agnostic”, it is nevertheless worth observing the outcome as steady returns compound over time.
The final picture below tells the complete story – the funds have been able to outperform the various underlying asset class components. This speaks to the ability to step on the right stones as the water is rising and falling and to keep your feet dry as the tide shifts and changes. The outcome is that the whole is greater than the sum of the parts.
Based on the above, we are confident in answering our self-imposed questions in the affirmative - we have indeed:
1. shown the ability to deliver consistent inflation-beating performance over time?
2. demonstrated the ability to preserve wealth in times of market volatility, i.e. provide some measure of “downside protection”?
One of the most common reservations raised by fund analysts regarding our methodology relates to our philosophy of being fully exposed to the asset class of our choice – this ‘committed’ dynamic approach challenges comfort zones and popular thinking.
However, given the obvious correlation between the returns of the multi-asset fund average and equities, either most multi-asset funds in the category are not meaningfully shifting between asset classes and/or the correlation between assets has increased to the point where little diversification is achieved between asset classes.
Either way, given the performance history of the fund, we believe that our rules-based, indexed approach has proven itself worth considering seriously; both for the performance it delivers as well as the diversification from peers.
The multi asset funds have received incredible support; in March 2020, the two funds combined were at around R50m, they have now breached the R600m mark and growth appears to be full steam ahead…
We are extremely grateful for the support that we have received – both from existing as well as new champions. The trust and confidence shown in Gryphon’s pioneering approach means that the new and the brave have a place to make a difference and will, we trust, deliver the just rewards.