A common question during turbulent market conditions is: “what can be done to protect our portfolios?” We have written on this extensively over the years and can offer three different perspectives: from markets; from our clients; and from Nutmeg’s investment team.
Turbulent markets are a fact of life
The market is uncertainty. It’s an abrupt statement, but you’ll not find a simpler – nor more accurate – description of financial markets. Perhaps a more familiar expression is: “there’s no return without risk.” Financial regulators all over the globe promote another expression in all investment product marketing: “investor capital is at risk”.
So, the market perspective is that volatility (i.e. risk, uncertainty) is very much a part of the natural landscape. However, the story doesn’t stop there. Longer–term returns become more consistent; the higher the risk, the higher their long-term returns normally are. The return landscape “smooths out” over time. Investment academics call this “time diversification” and it’s a concept well accepted by markets and regulators. We’ve written a blog illustrating this concept. It showed how major losses can often occur within a calendar year – even when the full calendar year returns end up positive.
Our clients’ perspective on turbulent markets
Experienced investors learn to love risk because they know that, over the long term, it brings returns. Don’t take our word for it, check out this blog that shows how our investors responded to seven episodes of significant volatility since 2012. It shows that after adjusting for normal, everyday withdrawals, on average, over 97% of our investors made no change at all to their portfolio risk following these market upheavals.
The bulk of our questions during periods of volatility come from inexperienced investors, who have yet to learn the behaviours exhibited by the vast bulk of Nutmeg investors. And we don’t underestimate how difficult many people find it to learn these lessons.
Even experienced investors who invested just prior to market turbulence ask questions about what could have been done to prevent it. This category of investor has indeed suffered unfortunate timing and so our best response to these queries is to continue taking a long-term perspective. But we would also like to give some insight into what we do as professional investors, actively managing our clients’ money during turbulent market conditions.
The Nutmeg investment team’s perspective
To come back to our original question on what Nutmeg does to try and protect our customer portfolios, for our Fully Managed portfolios we actively manage the asset allocation across all ten risk buckets.
At the low end of the risk spectrum, the questions we tackle mainly revolve around the prospects for bond markets, and at the top end, it’s all about how equity markets could perform. However, the truth is that nothing is independent in financial markets; all these questions are related. And it’s the role of the investment team to be methodically looking at market dynamics, economic data, government policy, domestic and geopolitics to understand the likely direction of bond and equity markets.
Nutmeg has developed its own tools for this analysis. Every month, we update and critically analyse 163 pages of proprietary chartbooks, six macroeconomic books covering the major economic and trade regions, and two books that document liquidity and investment factor frameworks.
We employ full-time risk professionals to understand the market exposures of each portfolio and how they correspond with team investment views. We have daily interactions between our five investment managers over unfolding news and market developments. We constantly test and challenge our underlying views and pay for independent research to avoid ‘group-think’.
We take a six to 12 months perspective, not getting unnecessarily caught up with current market noise. We certainly endeavour to smooth out our customers’ investment journey, but we don’t try to get rid of the volatility. That’s impossible.
Remember, the market is volatility/uncertainty. Against this context, we look through the volatility to analyse whether our underlying investment thesis is holding. We take time out to investigate themes more deeply, to enhance our ability to interpret the medium-term outlook. If our view changes, we’ll change our Fully Managed portfolios. If we do nothing, that’s an active decision too.
In a nutshell
Nutmeg is busy looking after its customers’ savings and investments. Our clients remain fully engaged with their investment goals and savings plans; some even raise their risk dial after significant market corrections. And the market is busy being the market; providing opportunities for capital gain for the patient and throwing up episodes of volatility to focus the mind of investors and investment managers alike.
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 performance is 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.Other posts by Brad Holland
