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OP ED # 1: NEVER PAT A BURNING DOG AND OTHER USEFUL TIPS


Reuben Beelders

Chief Investment Officer

March 2020


As a result of our investment philosophy and the associated disciplined investment process, we at Gryphon Asset Management find ourselves having secured absolute positive returns and significant relative out-performance for our investors.


In keeping with our ethos of simplicity and transparency we have compiled a series of ‘op-ed’ articles with the purpose of sharing a level of information that will facilitate a deeper understanding of what informs our process and the protocols and principles behind implementing it.


Because our process is uncommon, for those that are interested and intrigued, we’ve gone to great lengths to facilitate a 360 degree perspective. This includes stepping back and reflecting on our process holistically, which includes understanding the past.


In this first article we share with you some of the information that was commonly available in the public domain prior to the market adjusting. The purpose of sharing this is to help explain the environment in which our investment decisions were made; what information sources and market scenarios fed into the investment perspective at any one time.


In the words of Winston Churchill, “The farther back you can look, the farther forward you are likely to see.”


To this end we decided to review the minutes of past Investment Committee meetings and historic files to determine the commentaries that had informed our thinking. Below are some of the views expressed by well-known, international market commentators on financial markets:


1.1. “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises* by Carmen M. Reinhart, University of Maryland and NBER and Kenneth S. Rogoff, Harvard University and NBER, April 16, 2008


In Page 53, in their conclusion, they opine as follows:

This brings us to our central theme—the “this time is different syndrome.” There is a view today that both countries and creditors have learned from their mistakes. Thanks to better-informed macroeconomic policies and more discriminating lending practices, it is argued, the world is not likely to again see a major wave of defaults. Indeed, an often-cited reason these days why “this time it’s different” for the emerging markets is that governments there are relying more on domestic debt financing. Such celebration may be premature. Capital flow/default cycles have been around since at least 1800—if not before. Technology has changed, the height of humans has changed, and fashions have changed. Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant.


1.2. In 2015 Quarter 4, Nevsky Fund plc, published their final newsletter for the Nevsky Fund, explaining why they had decided to cease managing the fund. An extract from page 4 of their newsletter:


The direction and pace of global GDP growth is determined by just two economies; the US and China. Unfortunately, due to problems in both, the medium term global investment outlook is becoming increasingly uncertain. There is now a growing risk that the ongoing emerging market bear market envelops developed markets as well. US equities face a maturing business cycle, a growing risk that the Fed may have to rapidly tighten monetary policy, stretched corporate balance sheets and high valuations. At the same time, in China, the slowing economy and the ever increasing opacity of policy making cloud the growth outlook for the whole of Asia and the world in general.


1.3. On July 26, 2017, Howard Marks, principle at Oaktree Asset Management, concluded his investment letter as follows:

If you refuse to fall into line in carefree markets like today’s, it’s likely that, for a while, you’ll (a) lag in terms of return and (b) look like an old fogey. But neither of those is much of a price to pay if it means keeping your head (and capital) when others eventually lose theirs. …


1.4. There have been a host of global sell-side analysts, who have been particularly negative about global financial markets. These were referred to as “permabears” by the consensus, and obviously vilified by their peers as markets continued to trend higher. An example would be Albert Edwards, economist and global strategist at SocGen. Most have constantly cautioned about excessive leverage and have been underweight global equities.


1.5. Within South Africa, Neels Heyneke from Nedbank has cautioned investors about the risks associated with dollar liquidity. Like his international peers, up until about two months ago he had been subject to criticism for his caution.


2. But that’s not all. The World Economic Forum, in 2019, published “The Global Risks Report 2019 14th Edition”. Chapter 4 of this report is headed, “Going Viral, The transformation of biological risks”. Two quotes from this chapter:

“This chapter considers another set of threats being shaped by global transformations: biological pathogens. Changes in how we live have increased the risk of a devastating outbreak occurring naturally, while emerging technologies make it increasingly easy for new biological threats to be manufactured and released—either deliberately or by accident.

“Revolutionary new biotechnologies promise miraculous advances, but also daunting challenges of oversight and control”


3. And finally, a number of indicators, including local and U.S. profit, yield curves and commodity prices cautioned against being to exuberant regarding returns from equities.


This is just a tiny selection of the publicly available documents and research accessible to any fund manager around the world. There is a plethora of information available – the challenge is distilling the essence and being able to ignore the noise and distraction, the bright shiny things and remain single-mindedly focused on the process.

Some fund managers chose to overlook both the short-and-long-term indicators of excess and over-valuation. Our choice was to apply our minds as to how this information was likely to impact the future returns and, in turn, how it was likely to impact our investor’s wealth.

Every aspect of the global environment is in turmoil…and shifting as we write this. We continue to remain vigilant and informed and able to adapt accordingly. We remain resolute in our desire to protect and preserve our investor’s wealth.


In conclusion, the words of Friedrich Nietzsche: ‘And those who were seen dancing were thought to be insane by those who could not hear the music.’


In our next piece, we will go unpack the oft-quoted ‘proprietary indicators’ that direct our asset allocation. We will detail the factors in the business cycle that make up the ‘sell’ indicators that got us out of the market when it did, and the ‘buy’ indicator that will signal when it is time to get back in to equities …watch this space…

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