Business | Markets
Allocating assets after weighing risk
Where were you when Lehman's went bust? Lehman's was the financial services equivalent of the grassy-knoll when the US government (playing Oswald, and dealing with conspiracy theory), shot down Lehman's (Kennedy).
- By Sean Kelleher, Special to Gulf News
- Published: 00:00 October 11, 2009
Where were you when Lehman's went bust? Lehman's was the financial services equivalent of the grassy-knoll when the US government (playing Oswald, and dealing with conspiracy theory), shot down Lehman's (Kennedy).
Something that should not have happened did. The big difference was that the Leh-man's collapse had actual global consequences; a global, correlated, meltdown. So much for the nostalgia, what were the lessons?
Twelve months ago the first reaction to another "bust bank", for many laymen, will have been, "put the kettle on, there will be a solution". Days after Lehman's I was sitting with Glyn Owen, at multi-manager RMB Asset Management, London, and the severity of the situation dawned on me.
Owen's words went (something like): "This is unprecedented. My advice is to pull your children out of school because they will learn more from following this economic situation than from the classroom". Our daughter didn't agree.
Nevertheless, he was right. The reverberations were cataclysmic. Trillions lost from the value of assets.
In summary: the developed world's banking system collapsed; subsequent policies around the world led to the printing of dosh (quantitative easing) which brought the banking system back from the brink of disaster. And my daughter had more fun in the Art room?
Time to go back to the mentoring skills of Owens. What did we learn? You could ask a number of fund managers the same question. Their replies will be clouded (naturally) by their own view of the world.
The (big) difference with Owen is that his job is about managing fund managers. Multi-management. This means being open-minded across all asset classes; it means being open-minded across all management styles. It also means being pig-headed about absolute investment returns.
In short, as a multi-manager, Owen's principal consideration is one of producing risk-weighted investment returns. You state your risk attitude (tolerance-to-loss); he writes out the asset allocation strategy and chooses the fund managers within that strategy. Intensive risk-management.
What did we learn? When putting the question to Owens, the depth of asset range experience, and hundreds of chats with fund managers count. I pick out 5 lesson areas: first: "the need to value risk appropriately became apparent — risk became extremely undervalued in 2006 to 2007".
In simple terms, risk is usually described as volatility or standard deviation. If a Dh50,000 investment falls 50 per cent it is worth Dh25,000, and now needs to make 100 per cent to recover the initial investment.
We have always known that there is a trade-off between risk and return, but, it seems, the investment world forgot that in the pre-Lehman's bubble. Assets that fell 50 per cent and over still have large mountains to climb back up. Investors need to be equally aware of risk-rating (volatility numbers), as performance numbers.
As a multi-manager, I would expect Owens to care about his fund manager choices from both the performance and the risk perspective. It might sound obvious, but it isn't common.
Second, risk is not only about standard deviation. The need for a comprehensive rear-view-mirror should include liquidity, which, says Owen, "became ignored at investor's peril".
Amongst those who were most hurt were those who were most illiquid. Suddenly owning loads of property did not seem as wealthy as it used to. The best portfolio managers were those who found a way into cash quickly, and the best investor returns will include those who did not need to sell because they needed cash.
Toxic debt
Third, "beware [of] complexity". Especially if complexity is leveraged. How many people really understood toxic debt?
Fourth, the degree of correlation of assets during the post-Lehman's period stunned the investment world. Suddenly, China, the dollar, gold, banks in the UAE, and banks in the United States were all suddenly either correlated or inversely correlated. This led to what Owens calls "a failure of diversification". Exactly what diversification stands for needs greater scrutiny.
Fifth, "remember that price matters-prospective returns depend on starting valuations", which, according to Owen, means, "to be prepared in future to allocate assets dynamically based on valuation analysis".
Ultimately, the first five points lead to Owen's call for the world which he manages: "All of this calls for carefully constructed multi-asset portfolios managed on a risk profiled and in a risk controlled way, with dynamic tactical asset allocation to take advantage of valuation opportunities across a very wide spread of asset classes."
It makes sense to me, but how will I get this across to my daughter behind her easel; her wealthfare will depend upon it!
- The writer is chairman of Mondial Financial Partners.
Advisory: Tailor-made products
Name: RMB Asset Management. Multi-managers
Benchmark: Various. Benchmarks are individually tailored to investor risk attitude.
Volatility: Increases with risk appetite, from cautious to aggressive.
Risk Rating: Cautious: 5/10, aggressive: 7/10
Glyn Owens: 2009 strategy thoughts:
- Positive outlook for risk assets-pro-equities.
- Beware of a sharp rebound from structural imbalances in the developed world.
- Uncertainty remains: there is a need to be nimble and active.
- There is a continued case for investing in credit (Better downside protection than equities).
- Emerging markets face cyclical, not structural, headwinds.
- It is still too early to worry about inflation.
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