and envisage how it can help you, but unless you have a clear game plan for how long you are going to roll it out for and what would make you take it off, it can be a governance drain. Scott: In DB you leave it with the managers as much as possible and give them the parameters in which they can work. For DC, it is the member who sees the £1,000 going down to £800. Someone I know who is in an equity fund told me: “The manager is useless. Previously it was always going up, now it’s going down.” That is level of understanding. Booth: People tend to blame that on the pension rather than the fact that if you are going to get a decent return for your retirement you need to take some risk. Some research that was done six or seven years ago said that people want to be savers, not investors. Investing means stock market, stock market means gambling, gambling means losing money. It begs the question, what do they think saving is? How do they protect their money against inflation?” Bart-Williams: What’s ironic about staying in cash is that it pretty much guarantees you a loss in real terms, i.e. inflation will likely erode the future purchasing power of that cash. Datta: It is difficult to grasp the risk you take by sitting in cash in that returns are concentrated in quite a short period of time. The best of the gains can come in quite short periods, as little as 10 days of the year, so if you are out of the market you have missed out. A lot of investors fail to appreciate just how much risk they are carrying in being out of the market.


PI: So selling all your risk assets is not a good strategy? Datta: It is bad for your long-term wealth and financial health. That said, there is also a sense that some of the conventional wisdom over-eggs it by saying: “Ignore the volatility, ignore the downside. The market dips will be followed by recoveries.” Drewienkiewicz: In some markets that’s not happened. People are good at focusing on markets where you get V-shaped bounces but talk to people who have been invested in Japan’s equity market for 30 years. They have been waiting forever for that to happen. Datta: There’s no single solution to managing volatility. One must appreciate the risk of being wrong in terms of market timing, but also what a broad valuation means for implied expected returns. You still have to make a judgment on whether over the next three to five years the risk you are taking is worth the likely returns, and if it isn’t then potentially there should be an encouragement to de-risk but not to sit in cash. Just take a bit less risk because that risk is not being well rewarded. You have to make that judgment without going to the other extreme of piling into cash, because that doesn’t make any sense at all. Drewienkiewicz: The challenge is that on the flipside of the volatility coin there should be opportunities, but equity markets are difficult to call. You can obviously use valua- tion as a type of compass but it’s still not a perfect guide. There are other asset classes, credit springs to mind where the mean reversion is much stronger, where vola- tility should allow you to take advantage of the oppor- tunities. So if you have a portfolio that has spare cash, we like to see volatility, particularly in credit markets, as an opportunity to buy, depending on a client’s risk preferences. I feel much more comfortable doing that in credit than in equity markets where that mean reversion is much weaker.


April 2019 portfolio institutional roundtable: Managing volatility 13


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