Taking an active approach to investments
Whether it's the market's reaction to global events, the US political situation or the implications of Brexit, when it comes to asset allocation, David Warren is a firm believer in active management.
Asset allocation - how much you invest equities, bonds and cash - is the key decision for any investor. Every investor's optimal asset allocation varies over time - with their age, their personal circumstances and their financial position - and needs to be managed over time. Zurich takes an active approach to asset allocation believing that investors should never let their assets 'drift' passively. According to the pensions and investments company, investors need a combination of good advice and good products in order to achieve the best allocation for them at a particular point in time.
David Warren is chief investment officer at Zurich Life, which manages over €20bn of assets. His responsibilities include Zurich's Prisma range of five multi-asset actively managed funds, which are designed to suit investors with different attitudes to risk.
"The actions by Central Banks since the financial crisis have been unprecedented and nobody has any real idea what the full impact of ultra-low interest rates and aggressive bond purchases will be."
Add to this the equally uncertain political backdrop; whether it's Donald Trump in the US, the situation in North Korea or the implications of Brexit, and you begin to understand the many factors at play influencing the investment markets.
An active approach to managing money, including asset allocation products designed to help investors achieve the best allocation for their circumstances, is all the more relevant in the current circumstances.
Warren has worked in investments for over 28 years so there isn't much he hasn't seen from a global economic and political perspective. He says that in every one of those years there has been dramatic events and volatility, and while no one can predict the outcomes of these events, actively managing assets allows investors to react to changes across the investment landscape.
Investors that don't have the time or expertise to actively manage their asset allocation themselves, should seek an advisor or investment manager that does, and focus on products with a strong track record. "There is a myth that investment managers know the future, they don't, but the good ones have a solid assessment of price trends, valuations and market risks," Warren says.
He explains that the investment management team at Zurich regard valuation as the key indicator of prospective returns, but since they are trying to achieve the best outcomes for customers, they will always be guided by the trends in asset prices.
"Price trends combined with valuation give us a picture of the underlying level of risk in the market. We also need to be aware of extremes - whether of valuation, price trend or sentiment. Investors need to diversify their exposures but at the same time not be afraid of position size, market risk or price volatility," he says.
Warren also points out that there is no asset allocation that a customer can choose at a time that will work for the next five, ten, 20 or 30 years, simply because people's circumstances change so much. And their attitude to risk, or how much volatility they are willing to absorb, changes over time too.
Zurich's active management approach works according to Warren because of the right combination of skills. "We have a dedicated and focused team here in Dublin; we have a particular focus on macro-economics and the trends in asset prices. We try to combine the key top down macro-economic drivers with analysis of individual companies, so it's that combination that we believe contributes to the best outcomes for customers." When we talk about funds and investments it can seem complicated. So how does it all work? This video answers these and other questions.
Volatility is a term that is often used when discussing the investment markets. Essentially it means price rises and price falls. People tend to associate volatility with negative connotations. However, according to Warren, volatility can provide opportunities too.
"Volatility is a fact of life and it's something that we can take advantage of," he says. "By taking advantage of lower prices to add to our position, we are aiming to produce better outcomes. We don't try to fight against volatility, we try to manage it, and as active managers, we can do that. The passive investment approach however doesn't allow investment managers to do that."
It is true that no one can predict the future, and this was certainly the case when the result of the referendum on Brexit was announced. The result was unexpected, but equally the investment team at Zurich were in a position where they could react. At the time of the referendum Warren recalls that the UK wasn't performing particularly well compared to other markets. "Most people seemed to feel there was little positive that could come from a vote to stay, but that a vote to leave, could be catastrophic." Zurich's position was to wait and see. "The real issue for us on Brexit was how a negative vote would impact on the broader world and whether we should be concerned about the future of the EU. We expected that a negative vote would be UK-negative, especially for Sterling, but we were not convinced it was doom for the rest of the world." As things played out it became apparent pretty quickly that investors were focusing the implications more on the UK and not on the EU or globally. "That was informative to us", Warren says "and that did impact how we invested in the subsequent months. We took that as a positive signal - the fact that a negative vote in the UK, which could have potentially negative global implications, didn't. It told us something about how investors were disposed towards equity markets, and how much cash they did or didn't have, and we invested on that basis."
Given that we have experienced an extraordinary amount of change across the political and economic landscape recently, what way will Zurich focus its forthcoming approaches? "The actions of Central Banks post the financial crash is unprecedented. We don't know the full impact from zero or negative interest rates, printing money or enormous bond purchases. This will only be clear in retrospect and any guide from history is only partially helpful," Warren warns.
"We can be reasonably confident that there will be further short term volatility in some assets and likely longer term price trend changes in others. So to deliver the best outcomes for our customers, we have to maintain an open mind and to regularly reassess the balance of evidence," he adds.
When we look at the policy backdrop and the political one - whether Trump, Brexit, Asia or the Eurozone - the argument for active management is stronger than ever.
About: Zurich Investments
David Warren is chief investment officer at Zurich Life. The team at Zurich Investments is a long established and highly experienced team of investment managers who manage approximately €21.9bn in investments of which pension assets amount to €9.9bn. Find out more about Zurich Life's funds and investments here.