Eight years after the collapse of Lehman Brothers' triggered the global financial collapse, fund managers reveal the biggest lessons learned and those which remain on the horizon and are continuing to threaten the asset management industry.
David Miller, investment director, Quilter Cheviot
Lessons forgotten
"Though it took the world by surprise, it was the inevitable outcome of a long period of gestation." (Alexis de Tocqueville)
Looking back over the last eight years highlights how much has changed. Pre-Lehmans, interest rates were positive, banks did not tend to collapse unless fraud was involved, and central bankers talked about moral hazard as they struggled to control the financial system. Post-Lehmans, ultra-low interest rates and QE infinity has become the new normal.
Investors learned some lessons straight away which, with the passage of time, are being forgotten, while others took time to sink in and are still with us.
On the 'forgotten' list is the importance of market liquidity. If you cannot trade and are using borrowed money then you have a problem. Fund managers offering savers instant access, while investing in potentially illiquid assets had trouble in 2008.
The recent post-Brexit property fund suspensions were a useful reminder that investment, even in main stream asset classes, involves risk when there is a liquidity miss-match.
More regulation
Banks are now subject to more regulations than they were and are much less willing to take risk with precious capital. Depositors are also more cautious, asking many more questions about the security of their capital than in the past.
Regulation round-up: Ten key issues facing asset managers in H2 2016
In 2008 we learned that a functioning banking system is vital for economic activity, but that's not quite the same as complete protection for depositors and bond holders.
Of the lessons that took longer to learn, the importance of income is at the top of the list. Who would have thought that 30 year US treasuries would now yield less than 2.5%. The last time the long-term risk-free rate of return was over 5% was in 2007.
As low interest rates for longer has sunk in, the search for yield has intensified. Those able to provide it whether governments, companies or fund managers with imaginative investment strategies have been in greater demand as each year has passed. The re-rating of income providers across the quality spectrum continues.
Undoubtedly, the investment world has changed since Lehman disappeared. Lessons were learned both by regulators and investors. Eight years on, however, when the risk free rate of return is negligible or in some cases negative, all investment involves risk.
It is important to remember that quality, diversification and liquidity never go out of fashion.
