How should clients react in a market crisis?

Then as a crisis emerges, the initial irritation turns into a panic, the urge to sell everything takes over, and the adviser must consider how to handle the understandable panic they see, even from some longstanding clients. 

Joe Wiggins, director of liquid markets at St James Place, says: “In a crisis, clients’ time horizons get much shorter, because so much more is happening, we just think about the next moment. The hardest thing to do in that period of time is nothing, but if your portfolio is set up properly, that might actually be the best thing to do.” 

It is an urge that is not restricted to clients, says David Coombs, head of multi-asset investment at Rathbones Unit Trust Management.

He says: “Fund managers are human beings just the same as anyone else. They are just as prone to emotional reactions when they see a lot of red ink on their screens. Having worked in this industry through many crises the important thing is to step away from it a bit.

"Look at the investments that have fallen, and ask if you want to be invested at this level, but also, if they start to rise from the low points, ask yourself, you owned them at a lower valuation, do you want to keep owning them now they have gone up?

"In terms of conversations with clients, I would say that as a professional investor I am paid to make unemotional decisions, clients need to trust me to do that, and if I get them wrong, they can go to a different provider.” 

Eren Osman, co-chief investment officer at wealth manager Arbuthnot Latham, says: “Any investor can be prone to emotional biases. The key is to have a process, because if you have that, and stick to it, then you are detaching yourself from the emotional aspect. When a crisis happens, it is often the second order effects that do the damage.

"There is an initial sell-off, which then prompts people to sell-off whatever they own that is most liquid, and they don’t care about valuations at that point. And that causes valuations to detach from fundamentals, they do that on the upside when markets are buoyant, so they detach from fundamentals to the downside in times of crisis, and that is why crises can be an opportunity for investors.” 

As a professional investor I am paid to make unemotional decisions, clients need to trust me to do that.David Coombs

Coombs is more sceptical that crises necessarily represent an opportunity: “In that environment, your tactical asset allocation changes daily. Your strategic asset allocation should be the same, and remain within the parameters of a client's needs. But the tactical asset allocation changes as you react to how the events are moving. In a crisis, capital preservation can be the focus.” 

John O’Toole, head of multi-asset solutions at Amundi, says not losing money in a crisis is something to which clients are particularly attached, so even though there may be opportunities over the longer-term, this is often not central to a client's thoughts. 

He adds: “You can’t talk about relative returns [that is saying you lost less than the wider market], clients don’t care about that. What they care about are drawdowns, about losing money.  That is why we are always looking for hedges, for ways to protect portfolios. A crisis can always get worse, and so hedges are always useful. It is not simply a case that when a crisis happens, that is the bottom of the market.” 

Nature of a crisis

Ursula Marchioni, head of BlackRock Portfolio Analysis and Solutions, says the nature of the crisis is also an important consideration, as while one can use traditional hedges, each individual crisis will have its own idiosyncrasies. 

She says: “Having strategic asset allocation views and maintaining the discipline to stay invested during periods of market volatility is a key principle of successful investing. However, with significant geopolitical and macro shifts at play, coupled with uncertainty around the smoothness of the climate transition, it is more important now than ever to have uncertainty baked into your central portfolio return scenario at the outset. It also matters to have strategic views that incorporate a wide range of both positive and negative market outcomes, so that the strategic asset allocation you anchor to is more robust.

"Planning for different market environments based on historical scenarios is a great starting point when stress-testing the long-term investment thesis of a portfolio. However, on its own this approach can be insufficient. Every market crisis has idiosyncratic challenges and opportunities.” 

SJP's Wiggins says it may be best to be “systematic” about any portfolio rebalancing; whether markets are in a bull or a bear phase, have a process around when to sell, rather than acting as a result of either fear or greed. 

Marchioni says that major shifts in strategic, or long-term, asset allocation are needed now, such is the extreme nature of the changes happening around us, particularly in relation to inflation and interest rates, and she says that at BlackRock these changes will happen this year. 

She says: “When speaking to our clients and analysing their portfolios, it is clear big changes to strategic asset allocation are needed and will unfold this year. This is not only a result of the escalation between Russia and Ukraine, but also supply chain disruptions and powerful inflationary forces in place prior to that.

"Recent geopolitical developments have compounded and increased the urgency for some of these portfolio changes. Space for capturing tactical opportunity also remains and abounds – although with such a preponderance of hard-to-predict geopolitical factors, this is not an easy task.”

david.thorpe@ft.com