While risk for investment portfolios has been well-studied in the light of the financial crisis – if insufficiently before – the notion of long-term risk is still underexplored, according to Roger Urwin.
The global head of investment content for Towers Watson says that there are many facets to risk, which he has studied for the best part of 25 years. The big risk for fiduciaries is long-term risk: the risk of meeting the objectives of the organisation.
“Risk is more to do with wealth and not meeting long-term goals,” he says.
Some investors, who take a fundamental approach to intrinsic value and are not so focused on purchase and expected sale price of assets, have an implied principle of “margin for safety” in their investment selections.
Urwin says that of the two main types of risk, exogenous and endogenous, it is the latter which is more likely to produce “fat-tail” events. These include the unexpected events fuelled by investor herding, creating bubbles and correlated errors in pricing.
Exogenous risks, involving corrections in various asset classes or markets, political unrest, counterparties and so on, are easier to model and plan for.
One of the problems for CIOs and other investment professionals at funds is that it is very difficult for them not to be benchmarked against relatively short-term measures. Their funds may be overseen by politicians, for instance, who will tend to have a different focus than the professional investors.
“So, this is about education for the stakeholders,” Urwin says, “so that everyone understands there will be significant deviations from the path.”
He says the one of the few funds which looks at long-term risks publicly is Australia’s Future Fund, which publishes three-year risk figures.
“I think that’s the longest I’ve seen published,” Urwin says.
A related area of study for him is sustainability, which he defines as: “long-term investing which is efficient and fair on an inter-generational basis”. Sustainability is about more than ESG (environment, social and governance) issues.
Urwin points out that by 2050 the world’s population will have six times its current footprint on the globe, assuming a “business-as-usual basis” for growth.
So, something has to happen with technology to satisfy demand for energy, food and water, or something else has to give.