20 November 2017
Over the past week Australian shares were down 0.8% while small company shares fell 0.5%. Shares in developed countries were down 0.3% with the US market 0.1% lower. Shares in emerging markets rose 0.7%. The Australian dollar fell 1.3% to 75.64 US cents. The Australian 10 year bond yield fell to 2.57% with the US 10 year bond yield slipping back to 2.34%. The oil price fell 0.3% to 56.55 US dollars per barrel.
This year marks the tenth anniversary of the beginning of the Global Financial Crisis (GFC). For many members, particularly those that were retired or approaching retirement, this might have been a period of great stress. Yet many other members might be too young to have really experienced the impact.
This highlights the word ‘experience’. Experiencing historical events, provided you take the time to reflect and learn, helps you be better prepared for future events.
In 2007 I worked at one of Australia’s largest asset managers, heading up an investment area called ‘Fund of Hedge Funds’. It was an exciting job: essentially the job of my team was to travel the world and find the best hedge fund managers and then blend them together into portfolios. The GFC was a terrible environment for many hedge funds but for various reasons the fund performed better than most during this difficult period.
What are some of my reflections from the GFC?
- When banks stop trusting each other the whole financial system breaks down.
- Just because you’re a very smart person doesn’t mean you can’t lose lots of money.
- Investments that people consider to be ‘liquid’, or easily turned into cash, can potentially become illiquid.
- Some risk models work well in normal environments but might break down in stressed environments.
What are some of my learnings that we apply at Mine?
- Use a variety of risk models, which collectively should provide better insight into possible outcomes.
- Constantly study markets in an open-minded way to try and identify the key catalysts of future events.
- It’s hard to know what will start future crises, so it can be helpful to carry some ‘portfolio protection trades’ or positions which are highly likely to be profitable in a market crash.
- Maintain strong relationships with key service providers, because in a crisis event we need to have strong partners.
- While it’s not possible for anyone to guarantee that they will pick the next big crisis event, we can work hard to give ourselves the best chance, and be well-prepared for situations which might arise.
David Bell | Chief Investment Officer