Investors need to be aware of heightened liquidity risk, leverage and credit risk as an extended period of negative interest rates threatens to force many to chase returns, CFA UK has warned.
CFA UK outlined six questions investment professionals should consider when constructing portfolios or advising clients:
• Are my client's return expectations reasonable given the low expected future returns offered on many assets?
• In light of the above, are my client's current contributions (or savings) sufficient to meet their objectives?
• Conversely, are some clients assuming too much risk in order to hunt for yield in a low return world? For example, are risks now higher than they were for traditional portfolios with high government bond weightings?
• When considering risk, what are the limitations of my risk model(s) in relation to the assets in which the portfolio is invested? Do they, for example, rely completely on historic correlation, volatility and drawdown data which may not hold in the future? How have I addressed those limitations, even if only qualitatively?
• How long would it take to liquidate the client's entire portfolio? How much would it cost do so? How do those figures compare with the past and is the level of exposure to illiquid assets still appropriate for the client's needs?
• As the hunt for yield continues, are my client advice and investment decisions accounting equally as much for the risk characteristics of a product/asset as its return potential? Are my fees likely to look reasonable in a lower return world?
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Goodhart continued: "The current landscape also raises serious questions about how we ensure the large unadvised market of investors can still get the information they need about negative rates and the risks associated with them.
"This is something for the investment profession to consider, whether that be through the development of robo-advice, or other methods."
CFA UK said it had also identified some potential benefits arising from negative rates, including low funding rates making government and corporate capital-intensive investment proposals more attractive.
This could be particularly positive for the long-term infrastructure projects that are needed to meet carbon emission reduction targets and broader social and environmental goals, it said.
