At a recent Business Day | Financial Mail Investment Dialogue, in partnership with Gryphon Asset Management, MC Andile Khumalo asked the pertinent question: “Where is the best place for us to invest our hard-earned money?”
Gryphon Chief Investment Officer and Portfolio Manager Reuben Beelders explained why indexation is the rational choice: “Professions that take responsibility for people’s lives – all invariably use some sort of checklist.”
Referring to Atul Gawande’s book The Checklist Manifesto, Beelders said there’s a strong case in the investment industry for checklists: “There’s enough data and experience to help investment managers make good decisions, yet too many are ‘still flying by the seat of their pants’.”
“At Gryphon, what we have is a robust checklist built into our investment process – it’s a rules-based investment approach which we describe as indexation with purpose,” he said. “We believe that indexation should be a core component of any investment strategy.”
What is indexation?
“Every market has a broad index which represents the full components of the market – in South Africa that’s the JSE All Share Index,” he explained. “Our purpose is to replicate the performance of that index.” Beelders explained that indexation helps investment managers overcome inherent bias by giving them a checklist and strict rules to follow. “Further, asset allocation adds significant value to investment performance over time,” he said. “Our asset allocation decisions are also rules-based; driven by proprietary models, which enable us to avoid emotions and forecasts thus ensuring that we avoid errors of ineptitude and ignorance.”
Beelders continued: “Given that most active managers struggle to consistently out-perform the market over almost any time period selected, investors are faced with the challenging task of selecting managers that consistently outperform. The Gryphon All Share Tracker Fund has consistently produced market returns at an annual management fee of 0.2% p.a. thus offering investors a consistent out-performance of most peers in the SA General Equity category.”
Beelders ended his presentation by reading from Gawande’s book: “Knowledge has both saved us and burdened us … We need a new strategy to overcome failure … one that makes up for our inevitable human inadequacies … And there is such a strategy – though it will seem almost ridiculous in its simplicity … It is a checklist.” Beelders concluded: “At Gryphon, we offer you that solution: ‘indexation with a purpose’.”
What followed was a rigorous discussion on the merits of indexation and the importance of moving beyond the much debated active versus passive arguments. Delphine Govender, Chief Investment Officer at Perpetua Investment Managers, pointed out that it’s not the same debate that it was 10 years ago: “This is not a binary discussion – this is a discussion of how we can combine these elements.”
Govender said there are four components that help active asset managers find an edge in the market: behavioural, analytical, information and technical. Probed on the consistency of active fund managers’ performance, she added that there is a misconception that an edge is equally distributed over time.
Alexander Forbes Chief Investment Strategist Vladimir Nedeljkovic weighed in: “Passive is not passive anymore.” He said passive investment today is about looking at the market in a more systematic and efficient way. “The next step is how do you combine that with the true alpha that exists in the market in a more rational way using checklists.”
Tiaan Fourie of Ampersand Asset Management said they believe in diversification, which includes both active and index investing. He added that the biggest investment risk relates to emotion, most investors (including professional investors) simply don’t have the stomach to endure market draw downs. “Activity is almost always seen as a good thing, when in reality activity is in fact one of the worst things you can do in an investment portfolio,” he said. “Our argument has never been active versus passive. We believe they can co-exist.”
Beelders reflected. “Gryphon’s purpose is to deliver cost-effective, consistent and predictable returns by tracking the performance of the index thus giving clients exactly what they expect and are paying for. Over time, our purpose is to further reduce the cost of investment by democratising and de-mystifying the investment process, making it accessible and affordable to all.”