Confessions of a portfolio manager
Lessons from the GFC, how to prepare for surprises, and what it’s like to be responsible for investing hundreds of millions of other people’s money.
Symon Parish, Chief Investment Officer – Asia Pacific, Samantha Steele, Head of Private Market Strategies – EMEA, and Daniel Choo Multi-Asset Implementation Portfolio Manager at Russell Investments draw from their personal experience across many decades and continents to share insights into their challenges and triumphs and the lessons they’ve learned through volatile, uncertain and complex market environments.
Lessons from the global financial crisis
When the global financial crisis (GCF) hit, Daniel Choo was just about to graduate from university. He had a job lined up at an investment bank but he soon began to wonder if there would be a job to go to.
“I felt like I had just received my Learner’s drivers licence for the first time. But 2009, as we all know, was just a car crash. In addition, my stock portfolio that I had built up was being annihilated and the value of my financial degree was plummeting very quickly”.
Daniel says the experience of starting out his career during the GFC added a level of conservatism and cautiousness to his approach as a portfolio manager, “I think it is true for a lot of people who started during or after the immediate carnage of 2009.”
For Symon Parish, the GFC was the fourth market meltdown he had experienced. The first was the 1987 market crash when he worked as an engineer in Perth.
“The 1987 crash was when I lost most of the small amount of money I had saved by investing in dodgy mining companies based on tips from my mates who were geologists or surveyors. Perversely, that got me interested in investment and I made the switch over in a few years”.
It may not have been the first, but the GFC was the most dramatic market crisis Symon had experienced. By that time, he was working for Russell Investments in Sydney and dealing with what he calls “some crazy scenarios”.
Some of the managers that Russell Investments used were finding themselves in precarious situations. For instance, ABN AMRO, which ran an Australian equities portfolio for Russell Investments, became Fortis then BNP Paribas all in the space of a year as European banks underwent constant M&A just to stay in business.
“Normally this sort of organisational backdrop is something we try to avoid but when we looked at the team running the portfolio, they seemed very focused and tight, and our clients eventually benefited from us leaving that money in place”.
Symon also recalled how liquidity in short term financial markets dried up overnight, putting pressure on securities lending collateral and enhanced cash funds.
“We were faced with the choice of sticking with investments we were unsure the worth of, only that it was less than what they were being held at in the books or selling them and effectively locking in some lower valuation that you would only discover when the sale was made”.
“I think this was a time when you really had to sit down with people and work through the issues. The reality is that no one knew what was going to happen, so we took advice from those that were candid about what they knew and didn’t know. We definitely took some hits but I think we were better off from this approach.”
How to prepare for surprises
So how does a portfolio manager prepare for surprises, especially unpleasant surprises like financial crises and market corrections?
Symon believes a lot comes down to having a well-constructed investment process and sticking to it. The team at Russell Investments learnt a lot about that during the GFC.
“Before the GFC, our process required us to stick with our asset allocation, even when markets were falling rapidly. So while a number of other firms raised cash as the market tanked, we ‘hanged tough’ and as a result our portfolios didn’t perform as well relative to peers at that time.”.
“Our process helped us stay disciplined throughout the whole incident, and we came out the other side very strongly – not only were we fully invested in shares for the rebound, we had also opportunistically added some less liquid assets at fire sale prices. We went from feather duster to rooster in a year.”
Still, when the team at Russell Investments reflected on the GFC, they realised they could have done more to protect their portfolios on the downside, while still being able to benefit from the rebound.
“That’s why our portfolios now contain greater allocations to assets that are less correlated with shares and credit, why we added a dynamic aspect to how we build portfolios which is more responsive to what’s going on in the markets, and why we make greater use of option-based protection strategies.”
“We expect to see material market drawdown in the next few years and timing that will be very difficult, but we can be prepared for it.”
The importance of ‘checking under the hood’
Samantha Steele, who was as “in the thick of it” in London running a European property fund of funds when the GFC hit, says there were a couple of warning signs that something was on the horizon.
“Leverage was at extremely high levels and new funds coming to the market were heading into new markets, heading further east to places like Russia and Turkey in the hunt for yield.”
Her fund stood up well during the crisis.
“Looking back, I think it just highlights the importance of staying true to your strategy and not dialing up risk when finding returns hard to meet.”
Investing for the longer term in fairly illiquid markets, the alternatives team at Russell Investments undertakes detailed due diligence in advance of making investments to ensure that the risk of unpleasant “surprises” is low, or if probable, that the fund has a clear strategy of how to deal with that.
While we employ all the risk management strategies you would expect of an international asset manager when selecting alternative investment managers with which to place capital, what’s different about Russell Investments is that it undertakes Operational Due Diligence – lifting the lid of the organisation to check what is going on in their back-office processes such as cash management and conducting background checks on key individuals – to reduce any potential surprises.
“It is really important to undertake due diligence via a specialist otherwise you can be badly tripped up should we enter another GFC scenario.”
So how do portfolio managers personally manage the pressure of managing millions of dollars of other people’s money, day in, day out?
Samantha believes it’s important to remember that at the end of the day, she is helping pension holders such as her parents to be comfortable during retirement.
Symon says the key for him is having skin in the game. “All of my family’s super is invested in Russell Investments funds. I don’t want to have to go home and explain to my wife how I messed up!”.
So, in summary, how does one prepare for unpleasant surprises in financial markets?
Develop a well-constructed investment process, “check under the hood”, and watch out for warning signs.
Then if crisis hits - stay true to your strategy, take advice from those who know, and most importantly, learn from experience.
For more information, please contact your Russell Investments representative:
Sydney 02 9229 5111
Melbourne 03 9270 8111
Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (RIM). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation or needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. This document is not intended to be a complete statement or summary. Copyright © 2019 Russell Investments. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments.