Six lessons from a former global chief investment officer – Lesson number one: Never waste a crisis

There’s nothing quite like a crisis to humble any investment manager. If nothing else, my 30-year career at Russell Investments has taught me that periods of extreme volatility can highlight aspects of a fund’s strategy and operations that need improvement.

For our firm, there is perhaps no better example than the collapse of Lehman Brothers on September 14, 2008 – the largest bankruptcy in US history.

It taught us that an asset manager must know its exact position when markets dislocate – otherwise it will be forced to make calls with imperfect information.

This quickly became obvious because Lehman Brothers’ collapse affected more than its share price. It affected its money market assets, its bonds, its derivative counterparties, not to mention the myriad indirect effects it had on various markets. Soon enough you’re looking at how a dislocation event like this impacts an overall, multi-asset portfolio.

Russell Investments found that its risk management system was too bottom up when the collapse occurred. The firm had a good equity risk system, fixed income risk system and hedge fund risk system. But it didn’t have risk metrics that integrated at the total portfolio level.

Consequently, in the years following the GFC the firm rewired its risk management systems to provide a more accurate means of judging exposures. In simple terms, it swapped a traditional ‘accounting book of record’ for an ‘investment book of record’.

In the former, each manager in our multi manager portfolio would trade and report it to the custodian. After the settlement period of two days, or similar, Russell Investments would be notified and only then know exactly what assets it held.

Now, an investment book of record is built into our process instead. Both our team and custodian are notified about trades simultaneously. This gives us the same real-time trade information as the underlying managers, which we aggregate throughout the various asset classes and multiple managers to provide a detailed risk view of the total portfolio.

This new risk plumbing has paid off more than once.

When portfolios were hit by drawdowns early in COVID – the team knew its exposures and how to react. Before Russian sanctions eventually hit in 2022, it knew all Russian holdings and could ring-fence exposure across equities, fixed income and currencies.

And last year, when Silicon Valley Bank shut down on a weekend and clients rang – the team didn’t have to say: “our exposure two days ago was this” – it knew immediately.

By obeying the adage of “never waste a crisis”, Russell Investments put its clients in a position of strength to weather major periods of market volatility which followed the Global Financial Crisis.

Next time: Lesson two: Pressure creates diamonds … or it creates coal

What you need to know

This is 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.

Any opinion expressed is that of Russell Investments, is subject to change and does not constitute investment advice or offer to invest in any Russell Investments fund. The investments mentioned may not be suitable for all investors, it is very important to do your own analysis or speak to your financial adviser before making any investment decisions.