Tales of the unexpected: managing investment risk in 2017

Brad Holland


3 min read

Geo-political machinations over the past 12 months have led to a lot of market volatility. Our senior investment manager, Brad Holland, discusses Nutmeg’s approach for managing the unknown and planning for a multitude of political and economic outcomes ahead.

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Q) With the upcoming European elections, do you expect economic uncertainty and therefore poorer trading conditions?

There are a lot of risks to factor in, but that is always the case in financial markets. So yes, we have taken some precautions to help mitigate the fallout from a negative EU event, if it were to occur.

More specifically, we hold gold in managed portfolios from risk level 3 upwards and we are overweight in US dollars, which will help in a flight-to-quality environment. We have also taken a large share of our position in emerging markets through a minimum-volatility fund, which will help protect the downside if global markets get panicked by elections. And finally, portfolios are underweight in eurozone equities and the euro.

Q) How are you hedged against downside equity risk as returns on Nutmeg’s higher risk portfolios don’t seem to have reflected the upside in developed equities, post Trump and Brexit?

Nutmeg’s portfolios are multi-asset portfolios, so they will generally underperform equity indices during a boom phase. But they will also provide a more diversified exposure to financial markets across a whole cycle and in the medium-long term.

The diversification of holding different asset types is a kind of hedge, as you rightly point out in the question. Therefore, unless a customer is invested in our highest risk fully managed portfolio, level 10, it’s unrealistic to expect the portfolio to match an equity index during a rally phase.

Q) How do you hedge against the risk of Trump going to war based on a reckless decision? As in, how do you hedge against a war that people have not factored in yet?

That’s a great question! How to expect the unexpected? The answer is two-fold: one, via a diversified portfolio, and two, with much patience.

Nutmeg provides the former. And, if you invest in one of our managed funds, we also reduce the level of risk in your portfolio when we think the worst will happen.

But the patience has to come from you, the investor. Investing is a long-term process and one of the hardest things for investors to do is to stop themselves selling their assets at depressed prices. The patient investor can win not only via long-term returns that mean-revert around risk-adjusted levels, but via the compounding of these returns over time.

Q) You only trade twice a week. Does this mean you would not be able to respond immediately to adverse market conditions should they arise?

We trade twice a week primarily so that deposits and withdrawals can be executed with the minimum of delay. And while our main rebalance of managed portfolios tends to happen on the same day as cashflow investing, we can trade any day we see fit. We have adjusted our trading day in the past to change the allocation of customer portfolios quickly and respond immediately to adverse market conditions. And we will certainly do so again in the future if we think it’s necessary.

Q) Is it a good time to invest or should I wait until sterling goes up and stocks go down?

This is all about the main variable of investing — risk. No return can be achieved without risk being taken. And, by definition, risk is the uncertainty about what return will occur within a given period. A key uncertainty, therefore, is when to get into the market.

We believe that the timing and extent of your investments need to be in line with your investment targets and objectives. A balanced multi-asset portfolio is designed to provide all-weather return over the longer term. If you have short-term objectives for your assets, investment markets are not the place to be trying to achieve them. Investing is a long-term pursuit and customers need to practice patience when markets soften. But they need to be invested to be able to receive any return at all.

We have a positive view about investment returns in 2017. Nutmeg portfolios do contain an element of ‘insurance’ or ‘mitigation’ against a worse outcome in the way they are positioned, but we also stand ready to adjust the portfolios should events or data convince us to take a more defensive posture.

This article is taken from a live Q&A session that Brad hosted for Nutmeg customers on 21st February 2017, where there was a lot of interest in the global political landscape. You can also read about Brad’s opinions on two other big themes that emerged during the live Q&A – the impact of Brexit and Trump on the markets and finding continued value in markets.   

Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.

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Brad Holland

Brad is Nutmeg’s director of investment strategy. A veteran – 28 years at last count – in financial markets, he started his career as a professional economist at the Australian Reserve Bank. He now specialises in economic and financial market strategy within investment management. Brad studied post-graduate quantitative economics at the University of Queensland, Australia. Despite living in London for 20 years now as a naturalised British citizen, he’s still not quite ready to support England-v-Wallabies.


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