‘Don’t wait until you’re in a crisis to come up with a crisis plan’ – Phil McGraw
Everywhere you look at the moment there is an article about the collapse of Lehman Brothers or lessons that were apparently learnt from the events of ten years ago. I hope some lessons were learnt but – let us not kid ourselves – you cannot ever fully protect the global financial system.
The regulatory response in the decade after the Lehmans collapse has been a boon for compliance employment and associated regulation, but copious staff and a doorstopper’s worth of new rules, can never be a guarantee especially as every financial crisis is different. In short we have learnt to spot another set of specific criteria – particularly around leverage ratios and the risks around sub-prime mortgage debt – which helped lead to the collapse of major investment bank, but it will not help us avoid a future financial crisis, which will be different in focus and scope.
The biggest challenge to the world’s financial system remains rising cumulative borrowings being built up by governments, corporations and households globally. At the core of any banking sector business model is lending, but with all asset prices supported by this debt mountain, it is inevitable that a financial cycle which includes both boom and bust conditions will remain. If an acknowledgement of this ensures both corporate boards and regulators to keep asking questions, then the financial world has an opportunity to be a little less violently reactive, next time around. Either way, we will always have market cycles.
At the nub of any crisis is a euphoria which paints risky assets in a much more favourable light, leading to overallocation, bad decisions and, ultimately, big losses. This is why over nine years since the start of the turnaround in many global financial markets after the 2007-8 crisis, the key for any sensible portfolio management or stock selection remains understanding what you are investing in and why. As a consequence in the Global Dynamic Opportunities Fund we are focused on not slavishly following market preferences and biases. We prefer to find a combination of portfolio investments that give us a good chance over time of not getting caught in the trap of taking on too much, just at the wrong time.