Trustees with exposure to any of the major asset classes have just experienced the most volatile quarter in living memory. Equities, bonds, commodities and alternatives all suffered as a wave of volatility washed across every investment shore. Multi-generational wealth built up over decades has, in some instances, been destroyed in the space of a few weeks.

In the midst of this turmoil, interest rates have been cut to historic lows across all major currencies, presenting a significant challenge to trustees who, through prudence and caution, were positioned in cash. Whilst inflation hasn’t risen in the short term, harbouring non- or negative yielding assets will inevitably lead to capital erosion over the longer term.

Yields on gilts and investment grade bonds have reduced materially and many defensive stocks have cut their dividends either by choice or under duress from central banks. Ratings downgrades have passed almost unnoticed and one might question where the economic concept of a ‘risk-free’ rate remains viable.

Navigating the New Investment World

Never has it been more important for fiduciary professionals to assess and consider the suitability and appropriateness of the investments held within structures under their care. Whilst benchmarks and gatekeepers serve a valuable purpose, the ultimate responsibility to beneficiaries rests, as it always has, with the trustee.

The road to economic recovery may be long and whilst equity markets may have rebounded (at the time of writing the S&P500 had regained its October 2019 level), market participants will be subjected to considerably higher levels of volatility than they have become accustomed to over the past decade.

For ‘moderate’ risk mandates, there is a temptation to try and recover lost ground by deploying more capital to equity markets; however, this fundamentally shifts the dynamics of a balanced portfolio and may be outside of the confines of a trust’s investment policy statement. Trustees may also be drawn to more esoteric investments promising uncorrelated returns, invariably such strategies are not marked to market and illiquid.

Finding the Right Investment Strategy for a Trust

The immediate challenge faced by trustees as they review their Q1 statement is, once the damage has been assessed, to consider whether the pre-COVID-19 investment strategy will be suitable and effective in meeting the investment objectives of the trust.

Within our Investment Requirement and Risk Profile Questionnaire, we ask investors a set of questions to assess their risk tolerance. In ‘normal’ times, this process often seems academic and many clients, trustees and advisors complete the form as a box ticking exercise.

However, in bear market conditions the questions come alive and provide a true test of an investor’s appetite for and tolerance of risk.

Let’s revisit a selection of the questions. I invite you to ‘re-score’ along the way using a scale of 1 to 10 or the relevant time period:

1.All investments involve risk. What level of short term loss are you willing to accept in pursuit of long term investment returns?

Very Low (<5%) —————–="" very="" high="" (="">35%)</5%)>

2.How long are you prepared to hold your investment after a fall in markets to enable it to recover?

6 months —————– 10 years+

3.How would you respond to a sudden fall in markets? E.g a 15% fall in 6 months.

Sell all  —————– Invest more

4. How comfortable are you making investments?

Very anxious —————– Very comfortable

With the benefit of recent experience, you may find your responses are altered and of heightened relevance as you evaluate how to preserve and grow capital or generate income in the current financial landscape.

How Can We Help Trustees?

As an investment business we will be providing a series of webinars for trustees to assist with reviewing and revising risk profiles and investment objectives of the trusts in their care. We will also make available a library of resources as well a Q&A forum to provide practical support for trust investments.

We invite you to join us for the first webinar in the series that will be hosted on Tuesday 5th May at 3pm (UK time).

Follow this link to register for the webinar: https://hopin.to/events/risk-tolerance-revisited

You are of course welcome to contact our team prior to the webinar with any questions you would like us to cover, please do use us as a resource.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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