The Risk of Riding Too High

 

The fall of Icarus

During this life in lockdown, I have found myself doing a lot of things I always thought of but didn’t get to until now. Recently, for example, I listened to Stephen Fry’s books, Mythos and Heroes, on audible whilst attempting to do yet another amateur DIY project. I was amused by the old tale of Icarus and his father Daedalus, who were imprisoned on the island of Crete. Daedalus, a clever craftsman, built two sets of wings to help him and his son, Icarus, escape the castle. He warned Icarus not to fly too low to the sea, otherwise the spray would soak the feathers and weigh him down, but also not too high near the sun or else the wax holding the feathers would melt and cause him to fall to his death.

As with most Greek myths, this one did not end well. Icarus, being young and daring, flew everywhere. He got too close to the water as well as too high in the sky where, inevitably, he fell to his death. There are several lessons from this story, but the one that made me relate to what’s going on in the world right now given the covid-19 crisis is how Icarus caused his own demise. Amidst the exhilaration of it all, he ignored the signs and continued to fly high for the joy of the flight. Consequently, his fall was much farther, so far that it took everything away.

We have seen returns rise in many asset classes over the past ten years. The mixed investment sector, for example, continues to record higher than average annual returns every decade, despite repeated expectations of future corrections. This flight for matching and beating returns has caused many portfolios to fly higher and higher to reap these rewards. Then the most extraordinary volatility in history hit the markets and over the past three months’ returns have gone the other way. The effect was quicker and further, as if our wings had just been clipped. Indeed, for those funds like Icarus, the fall has been hard hitting.

Daedalus, who followed his own advice, did not enjoy the flight as much as Icarus, however, he also did not have the same fate. The moral of this story is that while a rules-based approach may seem unfulfilling, especially when markets make big gains, it too is safe when volatility suddenly increases. It’s only in hindsight when the falls happen that we see how wise it would have been to follow the rules of Daedalus.

Daedalus approach to investing

At Canada Life Investments, our managers follow a strict process with built-in flexibility across our multi-asset fund range. Our Portfolio Funds, for example, always stay aligned to each risk profile. This may seem boring at certain points in the cycle, but we aim to minimise the fall without having to make rash decisions on the assets we hold.

The benefit of this conservative style is reflected in our results during Q1 2020 within our Portfolio Funds: compared to other risk mapped funds, our fall has been lower and softer whilst still mirroring the investors’ tolerance to risk. Furthermore, we still have managed to provide outperformance in funds over the longer term. It may not seem like a joy ride during market surges, but unlike Icarus we were able to control our fate and weather the market seesaws we saw in March.

Source: Morningstar as at 31/03/2020, bid to bid with income reinvested. DT fund list is an equally weighted composite benchmark of every multi asset OEIC/Unit Trust fund which has been either risk profile or risk targeted by Dynamic Planner as at the 31/03/20. DT Active funds are a subset of the DT Funds which have been labelled as either active or blended. RTM funds are a subset of the DT Fund list of only funds which are risk targeted by Dynamic planner. The funds to be included in each category decided by research by Canada Life Investments. Green highlights LF Canlife Portfolio funds have outperformed the DT funds over the time period shown

Within our Portfolio Fund range, our III and IV funds were in the top quartile of their peer groups and two others in the second quartile for the three months ending the 31st of March 2020. This is due to sensible asset allocation and the performance of the underlying equity and fixed income funds.

In terms of our positioning, within our Portfolio Funds we have continued to match our strategic asset allocation, with adjustments to the underlying investments. As with Daedalus, we are adjusting to the wind to keep the funds on track without making any large bets or, as Icarus did, attempts to over compensate due to an earlier fall in returns. A prime example is our focus on tech within our US equity holdings. We held a higher conviction to the Nasdaq even before covid-19 struck and believe it will continue to outperform throughout the crisis and in the new norm.

For us, risk management is a function of relative weights, relative performance, liquidity and volatility of the underlying fund components, with constant observation of realised returns in both absolute terms and versus similar peer funds. A simple but safer way to invest in turbulent times. Not only have we shown a lower drawdown during the market falls, but, from the lowest point in the market on the 23rd of March to the 30th of April we also have been able to maintain the upside compared to the sector whilst continuously maintaining our Daedalus approach to investing.

Source: Table 1: Morningstar as at 30/04/2020, bid to bid with income invested. Table 2: Morningstar as at the 30/04/2020 for cumulative returns, as at 31/03/2020 for discrete performance. DT fund list is an equally weighted composite benchmark of every multi asset OEIC/Unit Trust fund which has been either risk profile or risk targeted by Dynamic Planner as at the 31/03/20. DT Active funds are a subset of the DT Funds which have been labelled as either active or blended. RTM funds are a subset of the DT Fund list of only funds which are risk targeted by Dynamic planner. The funds to be included in each category decided by research by Canada Life Investments.

Important information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.

Data Source - © 2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Canada Life Investments is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

CLI01622 Expiry 31/05/2021

 

Andrew Morris

Andrew Morris

Product Specialist

Multi-Asset

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