As the world is still grappling with the rising cost of living, the protracted war in Ukraine and geopolitical instability, keeping on top of risk management in portfolios is a challenge, according to James Penny, chief investment officer for TAM Asset Management.
He says: “Keeping discipline in investment positioning, not timing the market, investing for both short term capital preservation and long term capital generation, remain the pillars of prudent risk management and long-term outperformance.”
For multi-asset fund managers, who operate within set risk parameters, this often means keeping a firm grip on diversification and understanding how to blend investments.
Penny explains: “Risk is always rear-looking. Take growth stock portfolios over the past 10 years - they have largely just gone up in a straight line.
“They have shown little to no volatility with massive outperformance next to other asset classes, and importantly, have been acceptable within certain risk parameters.
Different investors with different risk profiles have different views on risk.James Penny, TAM Asset Management
“Fast forward to today, and that same portfolio is now multiple standard deviations riskier without having changed at all.”
This is why he believes diversification and investment blending remain “prudent approaches to managing market volatility in all cycles and this one is no different”.
Diversification, but not for its own sake
However, Penny warns against “over diversifying”, which is a risk in itself for clients.
He says: “Research proves critical in finding a manager who understands the right level of diversification required to achieve a risk blended portfolio capable of outperforming various market cycles without diversifying away the returns.
“It’s worth considering that different investors with different risk profiles have different views on risk and what would be considered ‘over-diversification’.”
In 2022, Sheldon MacDonald, chief investment officer for multi-asset at Marlborough, told FTAdviser that advisers and clients should: "Maintain a long-term perspective and avoid any knee-jerk reactions, because trying to time the market is very difficult indeed."
According to Penny, this underlines the importance of fund manager research for the purposes of suitability to one’s own investment needs.