Multiple global concerns including sovereign risk, geopolitics and policy errors, Chinese growth, inflation and the next bubble suggest a new focus on risk management may be required, according to MLC Investment Management investment strategist Brian Parker.
Historically, we have relied on the idea that if you are a particular type of investor – based on what sort of person you are and your risk appetite – then you should be in a particular risk bucket and can expect a particular level of returns over the long-term, Parker said at the MLC Implemented Consulting conference.
But there may be a better way to think about things, and rather than being return seeking, maybe we need to focus more on risk management, identify potential problems, and do something today to protect members and clients over the next three, five or seven years, he said.
"Can we rethink the way we do traditional exposures and approach equity markets?" he asked. "Can we rethink the way we mandate equity managers? If we think someone’s good can we let them loose more than we already have? Can we do more to encourage our active managers to not hug the index for dear life? Maybe there are more efficient ways to do it," he said.
Maybe in the short-term we need to put up with lower returns in order to really guard against risk longer term, he said. Parker questioned whether, as a manager, you would rather apologise to clients during a hot market run for only returning 25 per cent when the market was up 30 per cent, or whether you would rather be apologising to a client when the market was down 30 per cent for having lost 40 per cent.
Parker said he was worried about sovereign risk, and that even governments that will pay us back – including the US, UK and Japan – are only offering returns of one or two per cent. He was also worried about the next bubble, potentially gold, which he said could drop by more than half in the next three to five years, as well as emerging markets and commodities.
There is also a worry about policy errors and the chance we could end up with another global recession by policy accident; geopolitical issues will also rear their head from time-to-time, and maybe the only defence is to have a well diversified investments strategy and avoid as many of the bullets as possible, he said.
