The big secular trends affecting investment decisions today are relatively well-known and increasingly well-understood by investors. Whether it is geopolitics, interest rates and inflation, the energy transition and AI adoption, or any of a myriad of other issues, portfolios are built to avoid undue risks.
But resilience is most tested when portfolios are buffeted by unexpected events – the unknown unknowns, as it were – which is why it’s different from “robustness”.
“Resilience is one of those buzz words at the moment,” Australian Retirement Trust head of investment reliance and planning Jody Fitzgerald told the Investment Magazine Fiduciary Investors Symposium at Healesville last week.
“Every time I go to a conference, I hear the word ‘resilience’ constantly, but nobody stops to define what it means. And to be fair, it will mean different things to different organisations.
“When I think about people who have spoken about resilience…I would argue they’re not talking about resilience, what they’re talking about is robustness.
“To me, that’s not resilience, and it’s quite a nuanced conversation, but it’s really important.”
Fitzgerald said that if portfolios are truly resilient, then the inciting incident is irrelevant.
“The ultimate goal is to build resilience frameworks so that the event itself doesn’t matter”, she said.
“It’s the way that you actually transition through that event.
“In building robust portfolios, you almost need to have sort of full knowledge of the exact event, how it will play out, the magnitude, the time frame of it, et cetera, in order to be properly robust. Resilience is understanding that we won’t know that; that even when it comes to some of these bigger geopolitical events, you’re never going to predict those with any degree of accuracy.
“We may not be able to predict with accuracy, but we can prepare, and that is the idea of resilience.”
Fitzgerald said resilience isn’t about avoiding knocks, it’s having the capacity to absorb a knock and then bounce back “to a steady state”.
“Most of the discussion in the industry at the moment is around that avoidance, around that minimising risk,” she said.
Non-predictors
Future Fund director of research and insights Craig Thorburn said the Australian sovereign made about $115 billion worth of changes to its portfolios “just in the last two years, which is really trying to get us to this point of resilience” in light of three major secular trends of climate, demographics and geopolitics.
He said resilience and preparation begins with the fund’s economics and capital markets (ECM) team.
“We are not predictors,” Thorburn said.
“We come up with narratives, stories, scenarios, both cyclical and secular – cyclical being around three to five years, secular being 10 years-plus. The idea is for those scenarios, those narratives, to try and inform us of what the world could look like.
“The idea then is to have conversations amongst a wide variety of people internally, whether that be with other parts of what was formerly known as our strategy team, now separate units that still work very closely together; or whether it be even our sector teams, to basically try and understand what those future scenarios could look like.”
Thorburn said Future Fund then moves to portfolio integration, “which is a separate part of the organisation that actually is trying to get better at looking at this through risk lenses, which is really trying to map vulnerabilities”.
There’s then consideration of risk tolerance and meeting the fund’s mandate, and any changes that need to be made to make portfolios more resilient to external shocks or surprises.
New Zealand Superannuation Fund acting chief investment officer Alex Bacchus said for the sovereign wealth fund, the concept of resilience focuses on “achieving that long term objective and minimising the likelihood of things tripping us up along the way”.
That could include market drawdowns but could just as likely involve “the responses of stakeholders to events along the way”, Bacchus said.
“Whether they’re events from market events that create losses in the fund, or whether they’re something else that requires, in our case, a stakeholder to take money or do something else…there’s different things we can do in both situations to reduce the likelihood of those things happening”, Bacchus said.
From an investor’s perspective “there’s always going to be a lot of things to worry about”, Bacchus said., and “we’re always going to worry about all the possible scenarios, but there is only going to be one actual path”.
“I think we do always have a tendency to worry about a lot of short-term things that won’t happen,” he said.
Bacchus said that positioning portfolios to be resilient is “not necessarily so that we change investments along the way, but maybe so we will get some signposts to be able to deal with things at the time and also be able to solve those problems at the time”.
“We will [bring] groups from across the organisation, whether it’s asset allocation, our risk teams, our operations teams, investment teams, together,” he said.
“We’ll cover off it might be market events, or it might be events around funding sources, or things where we want to make sure that we can work through those and that we’re not reliant too much on certain areas of the market.”
