SIMPLE, BUT NOT EASY: UNPACKING GRYPHON'S PROPRIETARY INDICATORS
Abri du Plessis - Portfolio Manager
7th April 2020
GRYPHON’S MULTI ASSET FUNDS have 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 that is off-beat from mainstream 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 and sophisticated investment specialists, you are constantly aware of where you are seen in the food chain.
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 misbehaviour. They are certainly not easy to rattle; as can be seen below by the performance of their multi asset funds.
Source: Profile Media and FE Analytics
31 March 2020
Over a period of twenty something years this team has identified a number of indicators that assist in signalling the appropriate time to get into equities, or to get out of equities and into cash. 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 in the multi asset funds.
Historic evidence has been that equities have, over time, been the asset class of choice, and the asset class that has most effectively preserved the wealth of investors 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; if it is not, it holds zero equities. 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 to equities is via index 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 have been 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 is therefore 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 above, 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 draw-down 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 above. The purple line is the SA yield curve. The yield curve turns positive close to the bottom of share price bear markets. It's that simple.
It is that simple…but it is 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 focused 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.
You may also wonder why you haven’t seen or heard too much about Gryphon’s multi asset funds. There are some understandable reasons for this.
One is that because our funds are small and therefore do not qualify to participate in many of the distributed surveys. While the size element might be an understandable concern, in our case it is moot. Because our holdings will either be in cash or indexed equity or bonds, our performance and liquidity can be maintained regardless of the size of the fund.
Another reason is that, as a provider of low-cost investment products, we do not have the marketing budget that would enable us to present ourselves front and centre as you open your daily newspaper (or the electronic version thereof).
However, it has become quite apparent that the Gryphon multi asset funds are shaking up the status quo. The graph below reflects the performance of the Gryphon Prudential Fund against the largest peers in the same category:
Source: Profile Media and FE Analytics
31 March 2020
In conclusion, the principles behind the multi asset funds have proven themselves to be worth taking seriously. The funds are just on 6 years old and have thus established a credible track record. The benefits of having an investment approach that is clearly defined, based on data and free from emotion, prediction or forecasts are clearly apparent. As in the words of Winston Churchill, “It is always wise to look ahead, but difficult to look further than you can see.”