Road kill

Will McIntosh-Whyte reflects on the risky business of managing multi-asset funds, and why you should always remember the Green Cross Code.

Truck with bull ears

As investment managers we are an inherently risky business. We need to understand the risks we’re taking and, where possible, try to hedge against risks we’re concerned about. Going down this rabbit hole can take you into the realms of the known knowns, known unknowns and unknown unknowns, for those that remember Mr Rumsfeld’s infamous speech.

The various risks that can affect a multi-asset portfolio really are endless: inflation risk on government bonds, default risk on corporate bonds, recession risk for equities, discount risk for investment trusts, as well as geopolitics, liquidity, fraud, regulation, cybersecurity, technological disruption, etc. The list goes on. It’s a wonder we sleep at all.

Sometimes a risk can be not taking enough risk. I am sure many fund managers have found themselves in that position this year. The start of the year saw panicked markets, recession fears and a spike in people Googling “yield curve inversion”. It was very easy to get your tin hat out, but in doing so you would have missed out on significant returns so far this year, with US markets revisiting all-time highs, and “market melt-up” usurping the ‘most Googled’ mantle.

Howard Marks (of Oaktree fame rather than Mr Nice) always writes very concisely on the matter of risk and often reminds us that the issue with risk-taking is that much of risk is hidden, subjective and unquantifiable - and often never realised. It is the latter point that I often think is missed by many.  

If you walk across the road, you take on a known known. If you abide by the Green Cross Code (“Stop, Look and Listen” for those that weren’t 70s/80s kids) you should navigate the crossing safely (of course if it is a busy motorway, the chances of not doing so are increased). If you cross the road with your eyes closed, that is more of a known unknown – particularly with increasing numbers of electric cars on the roads! But if you run across the road without looking, after a day at the cricket and more than a couple of beers, like my friend Sam, that is more akin to an unknown unknown. To him anyway - admittedly not to others.

Now this was not the first time Sam had a few beers. And, by his own admission (“it’s a miracle I made it this far in life”), he may have done this numerous times before, but found himself on the benign side of chance. When he fell afoul of that chance, thankfully his run in was only with a Sri Lankan tuk tuk, resulting in just a few nasty bruises and a hangover tinged with shame. In investment there are some people who run across the road all the time without looking – some more knowingly than others. The majority of the time they probably get to the other side safely, but it doesn’t mean it was a smart thing to do. And the time that they don’t . . . well they might not be as lucky as Sam.  

Over the last few years, investors with overseas assets have had a tail wind from weaker sterling as a result of our current Brexit woes. Currently sterling looks very undervalued. If it strengthens, those UK investors could find their overseas assets worth significantly less. This may not happen – certainly in the short term with Brexit lingering on- hence it is a known unknown.

In our fund we have plenty of overseas assets, and as a result are hedging our euros and a large percentage of our dollars in order to protect the value of those assets should sterling strengthen. If the pound were to weaken, we’ll still benefit from some of our overseas assets that are not hedged, though we’d miss out on some of those gains. That is a risk we can live with. However, I fear for some investors it is not a risk they have really thought about, or protected against, and so it is an unknown unknown to them. They may still make it across the road safely, but we are looking both ways and it looks pretty busy!

 

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Rate this page:
Average: 5 (5 votes)

Subscribe to the In the KNOW blog email

Archive