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Top PMs name their biggest financial crisis lessons

From caution to avoiding wild predictions, three Citywire rated managers discuss how their strategies have been shaped.

Ten years on since the global financial crisis

Even fund managers with track records which span less than 10 years could tell you how monumental the market crash of 2007-2008 was and how it has shaped current market thinking.

But a decade on from the seismic shock which led to an international meltdown, what have investors learned and how have risk appetites been impacted by its long shadow?

In this round-up, we focus on the UK to find out what three managers based in the country’s financial heart believe to be the biggest lessons all investors now must be aware of.

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Ten years on since the global financial crisis

Even fund managers with track records which span less than 10 years could tell you how monumental the market crash of 2007-2008 was and how it has shaped current market thinking.

But a decade on from the seismic shock which led to an international meltdown, what have investors learned and how have risk appetites been impacted by its long shadow?

In this round-up, we focus on the UK to find out what three managers based in the country’s financial heart believe to be the biggest lessons all investors now must be aware of.

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Please sign in or register to comment. It is free to register and only takes a minute or two.

Market valuation can remain stretched for longer

Franklin Templeton’s John Beck references British economist John Maynard Keynes, who wrote many decades earlier that market valuation can remain stretched for longer than investors can remain solvent.

‘In retrospect, this applied to the extreme valuations of the many synthetic structures we saw prior to the crisis. However, 10 years later, this rhetoric still applies. But now it is in relation to valuations of many markets driven to abnormal valuations by zero interest rate policies of governments, purchases of government bonds by central banks, and the consequent actions of independent investors in search for higher yield through purchases of alternative assets.’

Citywire + rated Beck, who runs several funds at Franklin Templeton including the Franklin Global Aggregate Investment Grade Bond fund, added that these stretched valuations are augmented further by the ‘prisoner’s dilemma’.

‘Central banks are now faced with having to remove their own distortions from the market, while weighing the negative consequences of this removal on the wider economy.

‘The final irony of the crisis 10 years on, is that, if over reliance on mathematical models resulted in overconfidence in valuations of supposedly safe securities in 2007, algorithmic trading now seems to dictate valuations in the absence of clear policy leads from central banks, and in a zero interest rate world.’

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Don’t look back in anger

As is often the case, the temptation with the crisis is to look back and believe it was far more predictable than it actually was, according to M&G Investments’ Steven Andrew.

‘It is easy to forget that, at the time, very few experts across the economics and finance profession were predicting a crisis of the magnitude that actually took place. In fact, though we now point to August 2007 as the start of the crisis, it would still take over a year for the extent of the adverse effects to be known, and even longer for stock markets to bottom.’

Citywire + rated Andrews, who manages both the M&G Episode Income and M&G Income Allocation funds, said the biggest lesson from the crisis is an old one, and that investors should be wary of overstating their own knowledge or putting too much faith in experts.

‘The lead up to the crisis showed that we shouldn’t be complacent about the risk of highly extreme events, but the strong returns since then suggest that nor should we become overconfident that the only possible outcomes are negative ones. The important consideration is how much compensation we are being offered for the risks that are always present, including those we cannot foresee.

‘From a more specific standpoint, it seems that given the tendency of markets and regulators to always be fighting the last battle, we have made some progress in shoring up banks’ balance sheets and showing far greater concern about the impact of household debt and leverage in the financial system,’ he added.

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Defensive stock selection

AB’s Mark Phelps said the best way to play a crisis is to always be invested in higher quality companies, which was borne out in the 2007-08 crisis.

‘We were fortunate to be one of the few funds that performed relatively well in both 2008 and 2009, thanks to our strong investment process and valuation discipline. This meant that by the end of 2007, as valuations of some of the faster-growing companies became stretched, we had moved the portfolio towards more defensive names.

‘As the market fell at the end of 2008, these defensive stocks, such as Kellogg, held up well. Meanwhile, some high growth names, such as Chipotle, fell back sharply. At this point the relative attractiveness of faster-growth names returned, and we switched our focus accordingly.’

Citywire A-rated Phelps said the quality of the fund’s investments reassured clients that these companies would weather the crisis, which helped convince them to sit tight.

‘However, along with other investors, we hadn’t realised just how highly leveraged sectors such as financials were. We avoided these stocks directly, but we did get caught up in the secondary effects. We have since adjusted our investment models in this area and remain cautious of leveraged businesses.’

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Steven Andrew
Steven Andrew
74/139 in Mixed Assets - Balanced GBP (Performance over 3 years) Average Total Return: 20.25%
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403/416 in Equity - Global (Performance over 3 years) Average Total Return: 24.81%
John Beck
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