Lessons from the pitch

Craig Brown, Rathbones

Craig Brown, Rathbones

Like a rugby team has robust forwards to do the dirty work and speedy (hair-gelled) backs to show the flair, we balance assets which will truly offset each other in stressed markets and provide the necessary diversification.

We believe that doing this allows us to build portfolios which manage risk effectively and efficiently.

However, adding in a few other ideas that are uncorrelated to stocks and bonds, or provide specific protection against certain events, also helps navigate the market’s ups and downs.

Some people use a slightly dodgy rule of thumb here: they look for low-volatility assets with high returns. This conflates ‘low-volatility’ with ‘low-risk’.

Such investments have low volatility only because they are infrequently traded or have theoretical prices. This all boils down to you owning an illiquid asset.

Just like the first summer training sessions back in the day, when a terrifyingly huge new lad would turn up and you would assume he was a killer just from the look of him. It was not until the first game of the season when you realise he was actually a pussy cat.

Similarly, you may find your low volatility investment with the imposing track record falls apart right when you need it.

When it comes to simplicity, it is important to align your goal with that of your investors and help them understand what investing might feel like along the way.

I am yet to meet a client who gets excited about beating a composite benchmark created by a black box risk system.

Most have more straightforward, relevant needs, such as: “Over the long term, I’d like to be wealthier than I am today so I can maintain or improve my standard of living.”

And if this is the client’s aim, then why make the benchmark anything different?

When it comes to risk, we question why you would make the journey opaque or unknowable.

If you are going to try and explain the risk of a portfolio, why start by discussing standard deviation? Most clients could happily live their lives never knowing about it.

Rather than trying to explain jargon to our clients in order to show them how we are doing, we believe it is more helpful to offer them variability of returns as a proportion of the stock market than some abstract percentage.

So if equity markets fall by X per cent, a client’s investment should – all going to plan – fall by 66 per cent of X, 33 per cent of X, or even 100 per cent of X, depending on the risk they take. We want to help our clients get a sense of how their investment may actually behave.