Round table: Managing political and event risk P5

Monday 27 March 2017

Leading industry figures Wayne Bowers, Philip Chandler, CFA, Eoin Murray, Thomas Schäubli, and Jason Voss, CFA discuss the challenges that investment professionals face when managing political and event risks, and look at some of the implications of recent political developments.

In this roundtable, originally published in CFA UK’s magazineProfessional Investor(PI),we continue the discussion on the subject of political risk. You can read the previous questions of the conversation here

PI: Should all investment firms employ political risk analysts?

Thomas Schäubli: Sure, if they can afford it, why not? As I already said, we think that political risk analysis is an integral part of any comprehensive risk analysis. From this perspective, it makes a lot of sense to employ a political risk analyst. On the other hand, it’s perfectly understandable if smaller investment firms do not employ any kind of strategist or analyst beyond those covering the traditional asset classes. But a number of companies are now offering political risk analysis as a service to investors.

Eoin Murray: Investment risk groups should already have all the tools at their disposal that they require to properly analyse the potential outcomes from political risk. Combined with clear thinking about those outcomes, scenario analysis and stress-testing provide the bedrock for political risk estimation. We also employ a range of different metrics (the turbulence index, an absorption ratio, and estimates of policy uncertainty) to help guide our fund managers through the minefield of event risk.

Jason Voss: Yes, if they have any degree of active management, and they should do it either within the firm, or they should find an effective way to outsource the process. It is that important.

Wayne Bowers: At Northern Trust Asset Management, we believe that it is important to discuss, challenge and utilise views from a political risk perspective across portfolio and investment construction discussions. As professional investors we are naturally attuned to maintaining a disciplined apolitical and analytical stance regarding sovereign risk and demographic change, whilst ensuring we fully try and understand the implications political change will have on growth, inflation, currency and asset class valuations.

Philip Chandler: There’s a limit to what dedicated in-house political analysts could add – we can’t out-poll the opinion pollsters or insert spies into political institutions/parties! We do look at political risks and investors do need to be on top of publicly available political information, but really this is about portfolio construction in an unpredictable world – building a portfolio from a holistic top-down perspective that can weather different risks.