Article published in STEP Journal – Oct 2016
Avoiding the pressure of short term market distractions
With the ever changing political and economic global landscape, Mike Farley, Global Head of Fiduciary
Investment Services at ZEDRA, discusses the considerations of a fiduciary investor in navigating the short term
distractions to meet longer term fiduciary needs.
On the morning of Friday 24th June many awoke thinking ‘really – that’s not what was expected to happen’. Then
emails began flowing thick and fast, as the highly oiled financial services industry moved to plan B, releasing
their views and advice on what a vote for ‘Brexit’ means. The investor paranoia started to rise and investment
decisions were both encouraged and made, based on very little knowledge. How should a fiduciary investor
react and deal with this? The answer is: ‘as a prudent person would’.
Market data highlights that private investors have a poor track record when compared to the performance of the
financial markets, with 20 year average investor returns significantly below those of financial markets on an
annualised basis. Most analysis links this to, what is termed today, behavioural finance. Human nature is to buy
high, encouraged by having seen a strong recovery in the markets; or sell low, after becoming convinced the
end is nigh. Over the past 30 years, market commentators have presented many end-of-the- world scenarios,
from the crash of 1987 to the financial crisis 2008/09, but the world continues and companies keep on producing
as the consumer continues to buy.
Prudent fiduciaries, entrusted with the wealth of others, need to fully understand and comply with their powers
and duties. Those that hold the investment powers need to have a strategy in which they set out their investment
objectives. These should be aligned to liabilities, which, unlike the private client investor, rarely focus on the
views or needs of a single individual. Having set these, as and when liabilities change, usually linked to events
driven by the beneficial class, the objectives should be reviewed and amended as necessary. With a robust plan
in place it should then be applied to meet these objectives.
Interest rates will rise and fall; economies will expand and contract and while short term events should not be
dismissed, a fiduciary should put these into context against their longer-term strategy. What should be avoided is
suddenly deciding to change, for example, the base currency of the structure and the underlying assets from a
Sterling base to US Dollars, just because the UK has voted to leave the EU.
The more common pressures seen are ‘family’ wishes, often driven by the stronger voice in the family, to
liquidate everything into cash after a market event. Whilst it may be prudent to reduce the level of risk in the
asset base, moving everything into a single asset class is high risk. It also forces the need to get the timing right
twice, as at some point reinvestment will be required, which invariably is after a period of market stability and
recovery and most likely at a higher price than the exit point. Regular reviews should be encouraged and
documented, as a decision to do nothing is in itself an active decision.
During such occasions, it is important to focus on long term objectives. This should include knowing liquidity
needs so as to avoid becoming a forced seller, during one of the short term market set backs, accepting that
sometimes requests may come from ‘left field’. Ongoing monitoring reviews should evidence both this and the
level of comfort with an appointed manager. These should be weighted to medium term comparisons with peer
groups and markets alike, so not just the last 12/18 months.
There is little value in trying to second guess what may or may not be around the corner and how the markets
will react. However, history tells us that a well diversified portfolio aligned to investment objectives, with
occasional tweaks on the tiller, is the most prudent way to navigate the choppy waters.
Mike Farley is Global Head of Fiduciary Investment Services at ZEDRA – Jersey