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.
John Goodall, head of private client research, WH Ireland
Risk-taking on the rise
The collapse of Lehman Brothers was clearly a great shock. It is difficult to say with any confidence that the industry has actually learnt anything from the experience.
On the positive side, banks have worked hard to rebuild their capital buffers. Loan-to-deposit ratios have fallen sharply across the sector as operators have taken a more cautious approach, leaving them better placed to withstand the next downturn.
However, human nature is the same as it ever was. Markets are still dictated by the emotions of greed and fear. Cyclicality has not been eliminated from the markets with new high levels in the S&P 500 accompanied by record high valuation levels in terms of median price/sales and EV/EBITDA ratios.
Net margin debt, which represents the amount of money investors are borrowing to fund stock purchases, rose 10% in July alone to $319bn, against a high of $371bn in April 2015. This compares to a level of just $107bn in September 2008, indicating that investors are taking on a much greater level of risk than they were eight years ago.
Rob Morgan, investment analyst, Charles Stanley
Treading carefully
The financial crisis was a valuable lesson to investors about the limitations of diversification in a portfolio.
In a global banking crisis, there are few safe havens, and although gold, government bonds and certain currencies fared well, there was little protection offered by corporate bonds, property and many other assets designed to be less correlated - and thereby produce smoother returns for a portfolio.
Many multi-asset funds, some supposedly cautiously managed, were caught out by this. Correlation is backward rather than forward looking, and managers who thought outside the box and ensured their portfolios were not all facing in the same direction provided strong returns.
Eight years on, I worry that investor complacency is once again setting in. A traditional portfolio of equities and bonds may not be such an 'all-weather' solution as investors think.
With many markets and asset classes propelled by the same trend of central bank policies of ultra-low interest rates and quantitative easing, genuine diversification is hard to achieve and should once again be at the front of investors' minds.
We have probably seen this to a degree with the fund flows into the Targeted Absolute Return sector this year, despite mixed performance from many of the strategies within it.
Yet many absolute return mandates had a dreadful time eight years ago - so I would suggest choosing fund in this area, or any other diversification tools, very carefully.
