Our Risk Philosophy
All investments carry some degree and type of risk. It is key that these are understood by all parties and managed accordingly by us. They also don’t remain static but instead evolve over time, and perhaps more importantly, evolve over our clients’ lifetimes. Thus we open the conversation about risk in the early meetings with clients, keep it open throughout the investment process and carry it on as part of our ongoing relationship. How risk management is embedded in the process: • Your Risk Profile • Our Risk-Adjusted Portfolios • Alignment of Risk • Ongoing Risk Management
Your Risk Profile A person’s risk profile is a function of several considerations, including:
- Personal or friends/family members’ past investment experiences
- Knowledge of investments
- Objectives and time-horizon for each objective
- Personal Risk Tolerance/Appetite
- Financial Capacity for loss
The combinations of these factors would mean different risks will be prevailing for different people – savers still in early accumulation might be facing the possibility of not taking enough risk to meet their future objectives, while retirees would be focused on managing withdrawals, sequence of events and liquidity risk.
With the help of online questionnaires, examples and discussions, this initial stage works as the drawing board to map out a person’s individual parameters of risk and comfort zone.
Our Risk-Adjusted Portfolios Each individual investment corresponds to a certain level of risk – typically the higher the risk is so is the potential return on this investment. Based on these characteristics, investments are often grouped in asset classes exhibiting similar levels and types of risks – the main being fixed interest, property, equities (in order of increasing risk). Following our investment philosophy, we construct and manage a core set of asset class diversified, risk-managed portfolios – each representing a certain degree of market risk (as experienced by global equity markets). Our preferred measure of market risk is beta – the measure of volatility of a portfolio compared to that specific market as a whole. What that means is if an investment has a beta of 0.5 (market beta being 1), if the market suffers a 20% correction, this investment should only drop by up to 10%. Furthermore, including investments with different correlations of returns, further reduces the beta of the portfolio due to the “portfolio effect”. Therefore, by targeting a specific beta we aim to create portfolios of varying levels of risk, each suitable for a different investor risk comfort zone. Alignment of Risk Through the target-beta mechanism we can align a client risk profile (comfort zone) to a suitable risk-adjusted portfolio.
Of course, as both risk and client needs are dynamic variables, this alignment is regularly monitored and adjusted if the need occurs. Our portfolios’ achieved betas are tracked against their target beta limits on a quarterly basis. And client needs and comfort zones are either updated on an ad hoc basis, or at least once per year.
Ongoing Risk Management As beta measures volatility as a whole – both upward and downward, and most investors are significantly more concerned with downward volatility, we deploy additional tools to further mitigate downside risk:
- Varying diversification levels & adding assets with low correlation
- Factor tilts (focus on long-term growth)
- Trend following via technical analysis of moving averages
- Risk-parity based cashflow management/rebalancing
- Regular gain harvesting (subject to available tax allowances)
- Avoiding crystallization of losses
A combination of all these instruments working together ensures risk (downside in particular) is addressed, monitored and managed on a continuous basis.
We never stop learning about risk Ongoing research is essential to continue to challenge and refine our assumptions. Just as our approach has evolved over the last decade so it will continue to do so going forward.