Five years after the collapse of Lehman Brothers Holdings Inc. sparked a global markets meltdown, institutional investors have a better handle on risk in their portfolios, but aren't necessarily better prepared for the next “black swan.”
See sidebar: Lessons from Lehman, the global financial crisis
Institutional investors are paying more attention to liquidity, boosting the sophistication of their risk oversight and experimenting with approaches that adjust allocations in response to changes in that risk landscape. Even so, such efforts may prove only incrementally helpful when the next market calamity — inevitably different from the previous one — occurs, many investors say.
At the height of the global financial crisis in late 2008, Richard M. Ennis, then editor of the Financial Analysts Journal, called for “innovative thinking” to help the global investment community better cope with “volatile and unpredictable” financial markets.
Five years later, market veterans say progress toward that goal has been tentative at best.
“The most shocking thing five years on is how little the world has changed,” noted Robert D. Arnott, chairman of Newport Beach, Calif.-based money manager Research Affiliates LLC.
Market participants are more alert to risks now than before, but it's hard to argue they'll be any more prepared when the next crisis strikes, Mr. Arnott said.
With the crisis cementing the status of liquidity as a legitimate asset class, and liquidity's huge value premium during financial upheavals, “you would expect more resiliency” for institutional portfolios today, said Mark Anson, Menlo Park, Calif.-based chief investment officer of Acadia Investment Management — the Bass family office launched in April.
Instead, the current low-interest-rate environment has seen “many institutions jump with both feet into high yield, real estate, distressed debt — anywhere they can get some yield above U.S. Treasuries — and this puts them at risk even more for another crisis,” Mr. Anson said.
Meanwhile, most of those interviewed said it's too early to talk about the end of the last crisis when investors are still grappling with the impact of unprecedented central bank monetary stimulus aimed at returning the U.S. and European economies to a sustainable growth path. So far, that stimulus has resulted in asset inflation, rather than economic inflation, and “this has to reverse at some point,” said Mr. Anson.