Managing investment risk – it’s a science not an art
12 Jun 2019

It may not quite be Hollywood, but the world of investment management has created its own stratosphere of ‘stars’ over the years.

‘Star’ culture versus team talent

These managers gain high profiles, and draw in investors with their inspirational qualities and ideas.

To gain celebrity status, of course, they must produce standout performance. If they didn’t do that, they wouldn’t even get on the cast list. But those who become leading lights often tend to be charismatic, confident and even a bit maverick. And perhaps this encourages their enthusiastic followers to take more risks than they otherwise might have.

Falling stars

And just like in ‘Movieland’ – occasionally a star falls from grace. Excited hype can quickly give way to disappointing performance, followed by a stampede of people wanting their money back.

Just last week, a star fund manager suspended a failing fund, no longer allowing investors access to their money. This is obviously a huge inconvenience for those locked in, but it has also raised bigger questions about investment risk and how different managers approach it.

Investing is better with an ensemble

Here at 7IM, we don’t believe in star managers. We prefer a team-based approach to investment decisions – like a really strong ensemble cast. Many talents are better than just one, and we all work together to achieve the best possible returns for our clients. We think that all of our 7IM investment managers have special qualities, and our teams become far more than just the sum of the individuals.

Managing investment risk

As well as having a strong team of investment managers, we also have an independent investment risk team that works closely with them. All key investment decisions are run past this risk team before they are implemented.

The risk team reports to the Chief Financial Officer, not the Chief Investment Officer. Every investment is subject to rigorous checks and balances, and every portfolio is ‘stress-tested’ with industry-leading tools.

In the case of the equity fund that went into meltdown last week, our 7IM investment risk team may have also identified the risk that comes from investing in so many illiquid assets. Risk associated with liquidity is one of the key areas that the team considers, along with counterparty risk and, more broadly, market risk. There’s much more to consider than just the underlying investments themselves.

The investment risk team monitors all of our funds and their underlying investments on a daily basis. This constant checking of each position within a fund helps us make sure that our investment decisions are based on facts and not guesswork. It’s a process driven by rigorous teamwork, rather than charismatic individuals.

 

If you’d like to find out more about our investment risk management expertise and how we’re managing risk for our clients, give us a call on 020 3823 8678.

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Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority,
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