Industry Moves Q&A with Gryphon co-founder and CEO Steven Fleming

In 2014, Steven Fleming, along with Ashley Burtenshaw and Henry Cooke, founded Gryphon Capital Investments. In the almost four years since, funds under management have grown to over $1.8 billion and the manager has just launched a listed investment trust, scheduled to begin trading on the Australian Stock Exchange on 18 May 2018. Fleming spoke to Industry Moves about the fund’s investment strategy and its competitive advantage.

Why did you want to list an income trust?

We feel strongly that the trust structure is the most appropriate legal form of investment; balancing the investors desire for return and liquidity. The ASX listing allows Gryphon Capital to invest and construct the portfolio in a manner consistent with our institutional mandates, without the need to source liquidity for potential investor redemptions. The investors source liquidity through the ASX listing, enabling them to manage their investment as required.

Further, Australian retail and SMSF investors’ portfolios are excessively overweight cash, which is earning less than CPI and effectively eroding capital value. As such, we believe that there is a need for a product that offers strong yield and with a key objective of capital preservation.

What are some of the key features of an investment in the trust?

An investment in the trust offers attractive cash income, paid monthly with a key objective of capital preservation. The trust’s investments are in a diversified portfolio of secured debt with multiple investor protections. Although an investment in the trust carries more risk than a term deposit, it earns a significantly higher return than cash and a materially higher risk adjusted return than subordinated, unsecured income alternatives. Unlike many subordinated, unsecured income alternatives, an investment in the trust will not typically be correlated to the equity markets.

Do you think Australian investors have enough exposure to income investments (aside from cash)?

Compared to investors in other jurisdictions Australian investors have historically been well underweight fixed income and have a heightened allocation to cash and term deposits (cash). Typically cash is used for liquidity purposes. However, in our view a large number of Australian investors are using it to generate income and preserve capital. In a low interest rate environment this means those funds are yielding an inadequate return and not keeping up with CPI, effectively eroding capital.

Fixed income generally provides greater certainty for the delivery of income and the return of capital, as compared to other asset classes. Generally speaking, there is a trade-off between risk and return and this is why most fixed income instruments pay lower returns than listed equities and other riskier investments.

What do you do differently to other managers in this space?

Gryphon Capital is a specialist fixed income manager with significant experience in the Australian and International Residential Mortgage Backed Securities (RMBS) and Asset Backed Securities (ABS) markets. Our experience and proprietary database allows us to assess risk to create a portfolio of the best relative-value securities available within the investment mandate. We operate an active program with ongoing monitoring of relative value and risk, allowing us to switch investments where greater relative value exists for the underlying investors.

What do you like about managing income investments?

We are specialists in our field and enjoy utilising our expertise to achieve the best risk adjusted returns for investors within their investment parameters. Our proprietary database provides us with a rich source of information which gives us a competitive advantage over our peers and allows us to exploit market anomalies to maximise risk adjusted return for our clients. Ultimately, we believe that our performance speaks for itself, and we are proud when we look back over the performance of our investors’ portfolios.

How is it different to managing equities?

Fixed income investment is premised on the commitment by a borrower to pay an agreed rate of interest on the amount borrowed (principal) over a set period of time and, when that period ends, to repay the money in full. Equity investment has a number of similarities to fixed income investment, however, equity is a perpetual instrument and not based on the premise of capital return. Consequently, equity investment is inherently more risky than fixed income and in turn should receive a heightened return.