CIO Update – Managing risk amid periods of uncertainty

2025 has been defined so far as a year of uncertainty. The tariffs announced by the US in April caused concern among global investors, who witnessed a brutal market sell-off in the immediate aftermath.

But uncertainty is not unique to 2025. Previous events that also took markets by surprise include Russia’s invasion of Ukraine, the Covid pandemic and the Global Financial Crisis.

This raises the point, no matter how extensive our quantitative rigour and qualitive nous may be, we cannot say with full confidence what tomorrow may bestow upon us. Instead, we know entirely unexpected things will happen in the future with 100% certainty.

So how do investors plan for the unexpected?

Our risk management process was designed to ensure we take risk in a way that is commensurate with our conviction levels, but also with our appetite and ability to sustain inevitable drawdowns.

In that regard, one important tool in our arsenal is scenario analysis, which entails looking at past events and hypothetical scenarios to estimate how our portfolios might perform. We routinely use this to inform investment decisions and accept higher risks if our research finds that we should be compensated for doing so.

This approach has previously benefitted our holdings. In April, market losses were in line with what we had anticipated in a worst-case tariff scenario. We ensure our portfolios are rigorously diversified to help us mitigate drawdowns and keep inevitable portfolio losses in downturns within proscribed limits.

During the rising geopolitical tensions over the summer, for example, we analysed the potential market impact of the conflict in the Middle East. Our research told us that losses to our portfolios would be within our acceptable levels given our base case for economic and earnings growth to keep driving risk assets higher. As a result, we made no changes to our positioning, which has so far supported our performance.

Past performance should not be taken as a guide to future performance. The value of investments and the income from them can fall as well as rise and you may not get back what you put in.

Understandably, it may be instinctive to react irrationally following unexpected events. But not knowing when investments will bottom out is all part of the uncertainty, and this is when remaining calm and sticking to our investment process is paramount.  

From experience, we recognise that such losses are to be expected periodically, and it is prudent not to panic when the occasion arises.

Our risk management process guides us to accept risks that complement our strategies, and be well diversified to ensure we are not over exposed to one sector, region or asset class. 

We currently are ‘risk-on’ within our funds and portfolios, as guided by our investment process. This is through an overweight position to global equities compared to our benchmark. 

While our portfolios could be more exposed to market losses compared to our benchmark, they have been handsomely compensated for that risk by capturing some of the gains equity markets have produced since we took the position in November 2023. 

Our investment decisions are made based on our Anchor and Cycle process. Anchor analyses long-term market fundamentals whereas Cycle looks at where we are in the current phase of the business cycle. So how is all of this reflected in our portfolios?

Anchor — Long-term valuations show that global equities are currently expensive. But this does not mean there isn’t opportunity for further growth.

Cycle — Given where we are in the business cycle in terms of economic growth, lowered inflation and easing monetary policy, this environment is typically favourable for equities. The underlying fundamentals are supportive for earnings growth, notably in the US.

We are long-term investors. Through our risk management process, we are always cognisant of the impact any unexpected storms could have on our portfolios And we would never accept more risk than we are comfortable with.

This article should not be taken as advice.