• Christian Armbruester

Boys and Men


Why crashes are a wonderful way to discern good investment strategies from bad managers.

Separating the proverbial “men from the boys” is a great exercise in times like these. When markets come under duress, is when you really find out who has got a good handle on their risk management. To be fair, the bull market that has propelled financial markets to all-time highs, meant that countless managers have enjoyed record returns through no fault of their own. Better to be lucky than smart I suppose, but thankfully as of March this year, we can finally get a better picture as to who offers real value. So here is what to look for as you purvey the carnage and listen to all the commentary from those esteemed financial professionals.

No one beats the market. Although performance looked rosy all around up until this year, the S&P 500 slaughtered all in its path and according to research from the Financial Times, 99% of all active managers underperformed the index to the upside. That clearly begs the question: did 99% outperform as the markets dropped? It is a very simple analysis to perform at the moment and will clearly indicate whether you go active or passive going forward.

Ignore the rhetoric. Countless are the excuses and particularly when it comes to strategies that are supposed to deliver returns independent of what the markets do. The first sign that all is not well is when you hear “well the market was down 14% and we are only down 4%, so hardly catastrophic”. Yes, a special situations manager operating out of (very) plush offices in St James Square did actually say that. When I pressed him as to whether he had reduced his market exposure, he went on a 20-minute rant that he had spent 120 hours assessing the Coronavirus and convinced himself that this would be short lived, that was his view and that was that. Good for him I suppose, not so good for his investors.

It’s all about risk management. Every manager claims to have a great system to manage the downside, whether through diversification or by having in place so called “tail risk protection”. Well, what we saw on March 12th will put these claims under serious scrutiny. So called “safe haven” stocks such as utilities or telecoms got shredded, as did Gold and even US Treasuries succumbed to unrelenting selling pressure. So much for all those great models that base their risk management on correlation. The only way to make money when things sell off in a panic are being short the markets or being long volatility. The worst thing you can do is pay for insurance and then finding out when things go wrong that you paid all those premiums for nothing.

Final words of wisdom? Cut any manager who hasn’t done what they said they were going to do and stop investing in any strategies that are based on what has worked in the past. There are no excuses, no mitigating circumstances, and the only thing that matters is performance. For all the pain this crash may have caused, you will be better for it when things get back to normal. The markets will rebound, they always do, but paying for bad managers for many years can have a much worse effect on your financial well-being.

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