Tanguy de Lauzon: If an investor had the foresight in September 2008 to predict where we would be today, many would be pleasantly surprised with the progress financial markets have made. Of the many lessons, we see three that are prominent: first, the power of starting valuations; second, the avoidance of short-term thinking; and third, the importance of respecting what we don’t know.
Let’s rewind to March 2007 momentarily. These were the so-called goldilocks days, where the world looked as healthy as ever – but they were priced that way too. In some ways, it shares similarities to today, although we clearly see some stark differences too. For example, both 2007 and today share common ground with low unemployment, strong corporate earnings and a backdrop where many investors have experienced wealth gains. Yet, this time around is clearly different too, from trade wars to Brexit and everything in between.
It is at this point I’d like to reflect on what portfolio management really is about. If our job is to help investors reach their goals, then portfolio risk management must curtail both the known and the unknown. Of course, managing against the unknown is extremely difficult, but is really about having multiple performance drivers, not just one.
In considering potential risks, we need to resist the classic vividness bias, where we see the risks in front of us, but fail to see those around us.
Practically, this means being circumspect about what information we consume and how we consume it. We prefer to be cautious on markets like US equities, where market participants are focusing on the positives: strong growth, stellar earnings but where stock prices offer little cushion for less rosy scenarios.
At the opposite, we try to embrace negativity – places like the UK, Italy and even Turkey. We do this not because we like negative outcomes, but because they have identified risks that the market has acknowledged and sometimes priced in more than enough. We also look for markets that are under the radar, with recent examples including sectors like telecoms or healthcare. They may be much more boring than technology but bring different risk drivers to our portfolios while offering reasonable reward for risk.
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