THE STORY OF THE CHINESE FARMER
Chief Investment Officer
Business Development & Marketing
There is a sagacious tale told by Alan Watts about the Chinese Farmer; it goes like this:
Once upon a time there was a Chinese farmer whose horse ran away. That evening, all of his neighbours came around to commiserate. They said, “We are so sorry to hear your horse has run away. This is most unfortunate.” The farmer said, “Maybe.” The next day the horse came back bringing seven wild horses with it, and in the evening everybody came back and said, “Oh, isn’t that lucky. What a great turn of events. You now have eight horses!” The farmer again said, “Maybe.”
The following day his son tried to break one of the horses, and while riding it, he was thrown and broke his leg. The neighbours then said, “Oh dear, that’s too bad,” and the farmer responded, “Maybe.” The next day the conscription officers came around to conscript people into the army, and they rejected his son because he had a broken leg. Again all the neighbours came around and said, “Isn’t that great!” Again, he said, “Maybe.”
And so it is in the world of investments… toward the end of 2020 equities had a terrific run – the combination of positive news associated with a number of vaccine options looming, the outcome of U.S. elections, the finalisation of Brexit, and an ostensibly V-Shaped economic recovery powered equities to new highs in US markets and has local bulls bouncing happily to Jerusalema.
The final quarter of 2020 delivered the following returns: 9.8% from equities, 6.7% from bonds and 1% from cash; it appears that normal is re-establishing itself, and the market is behaving as expected with equities outperforming the other asset classes…but we should never forget that what is normal to the spider is chaos to the fly.
Nevertheless, equities are back running - isn’t that great! Maybe.
Gryphon’s decision to exit equities in August 2018 has resulted in the multi asset funds being underweight equities since then; as a result of this, the relative performance of these funds lags for the quarter.
Oh, dear, that’s too bad! Maybe...
Let’s have a look at what Gryphon’s multi asset funds delivered for the year?
While the returns of the funds over the last quarter were decidedly muted, the volatility in the first quarter supports the view of having been exposed to cash versus bonds or equities.
The sell-off in bonds as South Africa was downgraded, provided the opportunity to then purchase bonds at very attractive levels and our investors have benefited handsomely as value has manifested.
As you can see from the graph below, equities’ stellar returns over the last part of the year did not eclipse that of bonds for the full year.
Our recent article proffering analysis of the 19% annual performance of the multi asset funds serves to validate the crucial foundations upon which these funds are built: firstly, that the bulk of return is added via asset allocation and secondly, that Gryphon’s ability to choose the appropriate asset class at a point in time has resulted in consistent returns for investors.
The graph below illustrates the growth of the underlying asset classes against the performance of the multi asset funds since their inception in April 2014 to 31 December 2020; it’s notable that both funds outperform all underlying constituents.
We believe that, over the longer-term, equities is the asset class of choice to generate inflation-beating returns. It could reasonably be expected therefore, that these funds would be exposed to equities for extended periods of time.
Having said that, the overarching purpose of Gryphon’s multi asset funds is to protect investor’s capital. This may mean that, as a result of the underlying asset class, there are times when our returns are out of synch with the rest of the market which is why diversification is a critical element of portfolio construction. These funds offer two bites at that cherry…preservation of capital and uncorrelated returns…that’s no maybe, that’s just great!