Beware the risk: the other side of investing

Investment is a two-sided coin – on one side you have return, the potential to see your money grow alongside the companies and economies it is invested in. On the other side is risk, or the potential to see your capital shrink as a result of investing decisions.

While performance tends to capture the most headlines, risk should command our attention too. In fact, professional investors are so concerned by risk that they have developed multiple strategies to manage it – and it makes sense that paying attention to how much you might lose from an investment can be as important as how much you may gain.

We have previously discussed how a multi-manager approach to investing can be a lower risk, low cost way for investors to access a balanced equity portfolio.

However, risk management comes in many guises and while all multi-managers seek to manage risk, some go further than others.

Keeping risk management at the core

As we have mentioned, there are a plethora of risk management strategies available to fund managers, with risk management being of varying priority to different funds.

For Alliance Trust, risk management is a central tenet of the investing process.

‘paying attention to how much you might lose from an investment can be as important as how much you may gain’

In fact, the trust explicitly seeks to produce real, long-term returns for its investors through a resilient portfolio of investments.

It is not aiming to shoot the lights out – but instead to outperform its benchmark by 2% per year after costs over rolling three-year periods.

Multiple layers of investor protection are embedded in the trust.

Crucially, the trust takes no strong view on regions, sectors or investment styles, keeping its exposure to these as neutral as possible – which, should fundamentally limit the portfolio’s risk and ensure that returns are primarily driven by stock selection.

In 2017, Alliance Trust appointed global financial services behemoth Willis Towers Watson to manage its investments.

WTW operates as an advisor to pension funds and other large institutional investors around the world – which means it has a rich seam of experience and resources when it comes to managing investment risk.

The strategy that Alliance Trust asked WTW to execute on its behalf is one that WTW has successfully employed for numerous clients over the long term and for which it has a strong track record of managing both risk and return.

The right tools for the job

While the fund’s neutrality is an important aspect of how it limits its risk exposure, the unique resources of WTW and the structure of the trust’s investments mean that multiple layers of investor protection are applied to it.

WTW runs a multi-manager portfolio for Alliance Trust, made out of exclusive mandates of ‘best picks’ selected by the best managers WTW can find.

‘the structure of the trust’s investments mean that multiple layers of investor protection are applied to it’

On a basic level, this means Alliance Trust investors are not exposed to key man risk, where a single managers fallibilities, illness or departure could impact their returns to an outsize degree.

However, by having WTW conduct this process, Alliance Trust also ensures that a truly whole market approach has been taken to fund selection. Because of the volume of assets on which it advises, WTW has access to almost any fund manager in the major global markets and has the resources to assess each one in detail.

These same resources are deployed when it comes to monitoring the managers in the trust’s portfolio, with WTW taking charge of rebalancing and replacing managers where necessary, a further risk management tactic.

A risk management culture

A final, crucial factor in Alliance Trust’s risk management is its status as an investment trust. This means that an independent board oversees the trust to ensure it doesn’t take on too much risk – and to make changes to manage this where necessary.

This benefit has been exemplified by the board of Alliance Trust in recent years. In 2017, the board completely overhauled the management structure of the trust as discussed here, after the trust’s investments had become increasingly complicated over several years and performance had also slipped.

‘an independent board oversees the trust to ensure it doesn’t take on too much risk’

Since taking this decisive action, the trust has returned to normal service, delivering total shareholder returns of 33.8% over the last three years, against a MSCI ACWI total return of 30.6%.

With the trust targeting an OCR of 0.65%, future performance should not come at excruciating cost either.

While performance is a vital aspect of selecting portfolio holdings, keeping an eye on the other side of the coin is important too.

With a watchful board overseeing its investment manager’s activities and that manager in turn having the global resources to execute best-in-class risk management, Alliance Trust is a fund with risk management embedded in its culture.

Click here to read our full profile of Alliance Trust

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Alliance Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

_Disclaimer

_{This report has been issued by Kepler Partners LLP. The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.}

_{Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.}

_{Kepler Partners is not authorised to market products or make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.}

_{The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.}

_{The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.}

_{This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.}

_{Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s Conflict of Interest policy is available on request.}