Gryphon Asset Management, the boutique asset manager founded in 1998, is betting big on SA government bonds despite the country’s fiscal uncertainties as it says this asset class offers investors the best risk-adjusted return opportunity.
Cape Town-based Gryphon, which believes asset allocation is the main contributor to performance, has allocated 70% of the assets under management (AUM) of its two flagship multi-asset funds — the Gryphon Flexible and Gryphon Prudential funds — to government bonds. The remaining 30% of the two funds’ AUM is in local cash with zero equity exposure as Gryphon says SA’s yield advantage over developed markets will maintain foreign appetite for local debt, supporting the rand.
Gryphon’s latest fund fact sheets show its Flexible fund has R375m in AUM while its Prudential fund has R517m.
“People think they have to hold equities all the time to earn a decent long-term return, but equities should not necessarily be the default asset class at all points in time in the investment cycle,” says Casparus Treurnicht, a portfolio manager at Gryphon. “We don’t believe we need to invest in equities at all at this point as the potential risk relative to returns is simply not worth it — equities are just too expensive right now.”
Equity markets have rallied globally in 2021 as unprecedented stimulus measures from central banks around the world pushed markets to record highs. The JSE all share has marched from one all-time high to the next so far in 2021, lifting the index to almost 67,000 points.
Even so, Gryphon has steered clear of the stock market since August 2018 when it rotated out of equities and into cash, before making a big push into bonds as yields began spiking at the end of the first quarter of 2020 amid the worst of the coronavirus market panic.
Gryphon’s asset allocation investment strategy involves rotating the entire AUM of its Flexible and Prudential funds either into the maximum equity exposure or completely out of equities and into cash or fixed-income instruments, depending on which asset class offers the best value and return prospects at a particular point in time.
This differs from the strategy of most of its peers who typically buy all asset classes in predetermined proportions regardless of what the market is doing in the name of diversification.
“When we move into an asset class, we maximise the opportunity and go fully invested into that allowed exposure,” says Treurnicht.
‘All-in’ asset allocation
While Gryphon still uses the full diversification offered by the three main asset classes (cash, equities and bonds) it does not diversify at the same time, but rather takes “all-in” asset allocation positions depending on which asset class is best positioned to benefit in the prevailing investment cycle.
The strategy has seen its Prudential fund, which is regulation 28-compliant, return an annualised 11.79% over the past three years; while the Flexible fund, which not a regulation 28 fund, has returned 11.22%. That means both funds have beaten their benchmarks over that timeframe.
Gryphon is not concerned about foreign investors dumping SA bonds because it says the yield advantage offered by local government debt will be too high to resist.
“The main reason you want to hold SA bonds right now is because of their yield advantage over the rest of the world,” says Treurnicht. “Even if you factor in concerns about rand depreciation they’re still attractive because their yields are so high foreigners will keep buying them and that’s likely to keep the rand strong.”
The 8.5% yield offered by SA’s 2030 government bond compares with 10-year US treasury yields of just 1.15%, while 10-year UK gilts yield just 0.5%. SA’s yield advantage has already lured foreign investors back to the local market prompting them to purchase a net R11.3bn worth of bonds so far this year after dumping almost R40bn worth of the securities in 2020.
But what of SA’s fiscal debt woes? The economic impact of Covid-19 has increased SA’s fiscal debt burden to 81.8% of GDP, up from 63.3% in 2019/2020. Though finance minister Tito Mboweni plans to stabilise SA’s debt at about 95% of GDP by 2025/2026, Moody’s said on February 8 that debt could reach 100.7% of GDP by the 2022/2023 fiscal year.
“We are very aware of the fiscal pressure building on SA’s finances, but considering that some major foreign governments issued significantly more borrowings than SA we actually look better on a relative basis over the past year,” says Treurnicht. “High commodity prices over the past few months are also providing the government with a better revenue stream.”
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