Sometimes stepping away from your desk and talking to clients and advisers alike can shed a different light on the various issues of the day. For the last couple of weeks I’ve travelled round the country doing just this in what’s been an insightful and undoubtedly useful distraction from the day to day job.
With RDR just around the corner, it’s been hugely encouraging to see that most advisors are well down the line of readying themselves and their businesses. Indeed, perhaps scare stories of ‘Millennium Bug’ style meltdowns of advisers up and down the country are the myth we always suspected they might be.
In all of this debate, there remain contrasting views as to what is and will remain appropriate for investors’ capital as we move into the ‘new world.’ Risk has undoubtedly been at the heart of the discussion, with an ever increasing number of advisers utilising the myriad of risk rating tools that have appeared in recent years to deal with the difficult task of appropriate investment solutions.
Throughout my travels, though, it’s been interesting to hear what advisers actually consider ‘risk’ and ‘safety’ to be. In our eyes, risk is more than just a regard for historic volatility that a number of risk rating tools appear to suggest. Of critical importance is the idea that risk is a function of the price you pay. Indeed, the perception of safety and the reality can be two different things, if the price you pay for such safety is wrong.
As we have stated in previous blogs over the last year, traditional “safe havens” now appear some of the riskier areas of the market. Government bonds are a case in point, with US and UK sovereign issues racing to the line to see which is the greatest ‘return free risk’, as yields edge ever closer to zero.
The continuing premium being paid for certain classically defined ‘defensives’ across equity markets also highlights this dilemma. As investors found out, towards the depths of markets in February 2009, ‘defensives’ do not always outperform in falling markets. Prices can over-adjust and risk becomes holding over-valued safety rather than what simply appear the more volatile areas of the market.
Risk tools are all well and good as comparative tools and anything that encourages advisers to think more about the risks they take for their clients must be beneficial. But my key takeaway from visiting advisers was the need to consider what risk actually is and not simply to blindly prescribe to historic perceptions of safety. Asset markets ebb and flow over time, and whilst risk is many things, key to the consideration is the price you pay. With that in mind, there remain plentiful opportunities for investors to make good risk-adjusted returns as we move into the new year
Joe Le Jéhan is an analyst at Cazenove Capital