There is no shortage of debate as to whether asset managers can add value by actively buying and selling individual stocks. However, much less is said about whether they can add value by trying to time the markets from an asset allocation perspective.
Most research seems to suggest that asset allocation actually explains the vast majority of returns for investors, so it’s a bit surprising that we aren’t paying more attention to this particular issue.
One asset manager trying to debunk the myth that it is impossible to time the markets is Abri du Plessis, Portfolio Manager and Economist at Gryphon Asset Management.
He believes this misconception is costing investors dearly and has given investment advisers and asset managers a place to hide for not doing part of their job.
“It is commonly pointed out that investors cannot afford to be out of the equity market at any given time because “we cannot read the market” and the market may run. Thus, common practice is to sit through market downs, whether it’s only a correction or a more serious market crash, rather than be out of the market and risk missing out on the upturn.”
He believes distinction should be drawn between primary and secondary cycles. Primary cycles are usually on average 5-7 years long; approximately 4-5 years of markets moving up (generally called bull markets), followed by a market crash which usually lasts 1-2 years (generally called bear markets).
These bear market cycles or market crashes (commonly defined as >20% market drawdown) usually take about 2 years to return to pre-crash levels. This is as opposed to a market disturbance or secondary cycles which occur during the bull market phases. The secondary down cycles are generally called corrections, with declines greater than 10% but less than 20%, are short in duration (rarely longer than 3months) and usually sentiment driven.
Du Plessis says that given the magnitude of bear markets, it is prudent that they are not ignored and endured if it is possible to avoid them. Corrections can be ignored because their effect is quickly erased in a raging bull market.
He says the myth that the market cannot be timed has resulted in multi asset funds (or their managers) varying only slightly in the allocation spread regardless of the market cycle. “But, by the mere fact of adjusting the allocation of assets, asset managers/financial advisers tacitly admit that it is possible to time the market.”
What about lifestage portfolios?
He believes that risk profiling investors is another concept that the investment community came up with in what he believes is an abdication of their job. “To propose that people ‘of an age’ should be more invested in income products to protect them against the risk of the equity market is a fallacy. Those ‘aged’ investors need as much protection against inflation as the young guys. And vice versa; the younger investor should be just as protected against the erosion of bear markets.
Du Plessis believes it is possible to reasonably consistently call the primary market cycles. “The secret is to stand back and unemotionally invest according to the factors that have proved reliable in the past. By unfailingly sticking to the rules, recognising the factors that identify the primary cycle, this simple yet very effective strategy has delivered top decile performance.”
So where does that leave us right now?
The Gryphon Asset Management multi asset range of funds has been completely out of the equity markets since late August 2018. During that time we had a significant market dip in December, followed by a big rally in the first four months of 2019.
Du Plessis says the local SA equity market never rallies when global markets are in a bear state. “With global markets currently already discounting a “Goldilocks” scenario, and the local economy struggling, we cannot see the local equity market (from current levels) beating the 7.5% plus investors can expect from risk free cash. We are comfortable with the fact that our indicators have not yet directed us back into the equity market.”
But does it work in practice?
When I first heard about Gryphon’s approach, I was actually quite surprised. Like most people, I just accepted as fact that it was not possible to time the markets at all. In fact, my personal efforts at trying to time markets or currencies have been pretty woeful. I often joke that a smart investor would do well to watch the timing of my trades and just take the opposite position.
However, there can be no arguing that the returns that Gryphon has produced over multiple time periods using their specific market timing philosophy are impressive.
An online search made it painfully obvious that there is not a lot of easily accessible information out there to either verify or refute the Gryphon approach (specifically its approach around making asset allocation decisions based on proprietary indicators of primary market cycles and ignoring secondary ones).
I think it’s also worth considering that in South Africa in particular, being in cash for a couple of months at a time still gives you a decent return due to the high interest rates on offer.
I guess this is just one of those times when you are just going to have to make your own mind up as to whether you share their convictions.