Amid today's low yield environment, stretched asset class valuations, and rising geopolitical and monetary policy risks, it is important the focus towards downside protection is consistent, practical and reliable. With this in mind when, and how , should portfolio risk be dialed down?
The managers of the Investec Diversified Income Fund monitor two types of risk closely: systemic and event risks.
Stress testing against both of these provides them with an understanding of the upside or downside risks of their portfolio positions. As financial market stress or event risks develop, the risks to drawdowns are heightened, reducing the attractiveness of the risk/reward environment. In such situations, the risk taken by the strategy can be ‘reigned in'.
This is a method that was implemented in June 2016 by fund managers John Stopford and Jason Borobora ahead of the Brexit vote.
Whilst many of Investec's competitors chose to back a remain stance, the managers chose to implement a defensive position within the Diversified Income Fund. In this video, John Stopford explains why and how they analysed both market movements and their fund positions both before and after this historic 'risk' event.
To learn more about risk and Defensification, you can read more in this exclusive guide here: Investmentweek.co.uk