Neil Birrell: A crisis in the life of a fund manager

Over the past few weeks I've been asked quite a number of times about what fund managers actually do during periods of extreme market stress, even up to the point if this is what we live for and find exciting.

It is certainly not what we live for or find exciting; it may be if you have a very strong view expressed in your portfolio positioning and profit from the market moves, however, most funds are more mainstream. I find what I do is worry - all the time.

I have seen more market crises than I am willing to admit and while it is possible to draw comparisons with what might happen within and between asset classes in different crises, they are caused by different factors and therefore the recoveries are triggered by different factors. However, the actions and reactions of markets to these different factors can be similar.

I believe the key focus for any fund manager at all times should be the aim to meet the investment objective of the portfolio being managed, whether that be an equity pension fund within a tracking error band, an absolute return fund or an income target that needs hitting.

Achieving any investment objective is more difficult in periods of turmoil, as asset prices will behave unpredictably at specific times. This could be driven by a number of factors, but the most common one centres around forced selling and liquidity.

It's almost impossible to predict what the trigger will be for the start of a sell-off; you will be able to see what the reason was; extreme valuations, a bank going bust, a global pandemic etc., but often not the catalyst. So when it starts, the fund manager (me) frets about whether it is "real", how far will it go, how long it will last, what's happening to holdings and what others are doing.

The focus can be very short term at this stage, which admittedly is not what most of us are here to do, but it is impossible not to worry about significant downside risk and on the other side of that look for opportunities that appear. Equity investors are typically optimistic in outlook and usually adopt the latter of those two standpoints, bond investors are often more pessimistic.

The thought processes that you can go through lead you to the extremes, ranging from a view that everyone else is wrong and the markets should not have fallen, to no one "gets it yet" and they should be much lower.

One thing is certain: "the market" (which could be considered as the aggregate sum of knowledge at that point) knows more than you do and it is important to look through the short term and not get whip-sawed into trading that can harm performance. The best solution is to go back to basics and focus on the mandate and the usual investment time horizon.

If a fund manager takes decisions to change portfolio structure during a big sell-off it can have a significant negative effect on performance that can have long-term ramifications, maybe even career defining ones, if they are wrong. The interests of the fund manager are closely aligned with those of the client.

On the other side of the coin, making good decisions in periods of stress can add significant value, but it doesn't make a career - my point being that a good fund manager shouldn't be reacting to the market maxim of "fear and greed". They should be reacting to what is in front of them and in a proportionate way.

The next stage is obviously the recovery, which leads to more questions: is it real? Is it really in a bear market before the next sell-off? What should you buy or sell? The answer to all of those questions are the same as what you should do in the sell-off: focus on the investment objective and act accordingly.

None of this means that I think fund managers should do nothing, in fact I think being active is crucial - just be considered and look through the market moves and volatility to your end goal.

There are a number lessons I have learnt from previous market crises, the first being remember what happened. Each one differs in cause but the effects are quite similar.

The vast majority of money invested in financial markets will be impacted by market direction and therefore it is difficult to avoid participating in the falls, mitigating the impact is key, staying in the game for the recovery is crucial. When the recovery comes, remain cautious, you will take part in the rally, but there is little way of knowing when the rally may falter. In general I think it is better to outperform on the way down than it is on the way up.

To finish where I started, I think worrying in general is a good thing for a fund manager to do in a crisis, it may not help your persona, but it will help your clients. Just worry; don't panic, don't make rash decisions, don't be too short term - meeting your long-term objectives is your job.

Neil Birrell is and manager of the Premier Diversified fund range and chief investment officer at Premier Miton Investors

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