Money Managers Virtual Round Table

Perry Teperson: As long as there is human emotion in the market, there will be bubbles that burst from time to time. No doubt, there will be more regulation and less risk-taking that comes out of this. Hopefully, we will all be a little smarter for it.

Rob Vanderhooft: In only a few quarters, we’ve seen markets swing from irrational exuberance to paralyzing fear, where logic no longer prevails. Certainly, similar ‘enthusiasms’ can happen again, although rarely for the same root cause.

Benoît Durocher: Regulations may be put in place following the current crisis, but the market will always find a way around them. There is no fail-safe way of ensuring that the market will not get ahead of itself. However, central banks have learned a lot from the current crisis.

Damon Williams: Not only could it happen again, it certainly will. The phenomenon of investment bubbles building and bursting is driven by cycles of greed and fear—fundamental human characteristics. But the specifics of each bubble are different. And even if you manage to identify a bubble before it bursts, it can persist for a long time. The pressure for investors to participate in them, rather than to sit them out and miss out on extremely high short-term returns, can be immense.

Peter Lindley: Having witnessed several ‘once-in-a-lifetime’ events—from Black Monday in ’87 to the tech bubble bursting—it seems highly likely that another similar event could occur in the future. The challenge will be in being able to anticipate the market shock early enough to be able to avoid or withstand it.

New regulations and the elimination of the independent investment banks will likely mean that it will be several years before a similar credit crisis materializes. However, this is not to say that a different type of crisis will not unfold much sooner.

How do you prepare for and deal with volatile times like these, and are there opportunities to be had?

Rajiv Silgardo: What has transpired over the last 12 to 14 months has been unprecedented in many ways. It would have been practically impossible to anticipate and prepare for.

However, one practical solution for investors is to always have a full view of the investment risks in their portfolios and where those are coming from. They need, at all times, to know and understand not just the asset allocation of their portfolios, but also the underlying risks.

If they did that they might well discover that what looks like a properly diversified portfolio on the surface, is actually not diversified at all in terms of the drivers of volatility of returns. For example, in a typical 60/40 stock-bond balanced portfolio more than 90% of the volatility comes from the equity portion. Once you know that you can steps to protect against it.

Rob Vanderhooft: You rarely anticipate market downturns of this magnitude. Market timing, beyond holding modestly more cash in difficult times, is not something we would tend to recommend to clients but rather, to stick to their long-term asset mix policy.

As far as security selection goes, there are always opportunities. Overall, however, a return to a period of strong economic growth continues to be pushed out, as the credit crisis has had an impact on the real economy and consumer confidence. Equity markets tend to move in advance of that economic recovery, though it is looking more and more like late 2009 or early 2010 for sustained economic recovery.

Perry Teperson: Panic has set in among retail investors. While everyone was unprepared, we need to keep a cool head. Our country isn’t going bankrupt, and our financial system is stronger than most. We’ve been through slowdowns before, and they will happen again.

As money managers, we do see some good opportunities in the markets. As an example, some 10-year bonds issued by Canadian banks pay almost 3% more than a government bond today. That’s an extraordinary difference in our low interest rate environment.

Peter Lindley: While it is impossible to prepare for every eventuality, what differentiates how businesses perform in volatile times is the strength and diversification of their revenue sources, the liquidity of their balance sheets and not being overly reliant on one form of financing. Companies that have failed in the current environment have had an over-concentration on one business area, often combined with a highly leveraged balance sheet and an over-dependence on short-term financing.

Nonetheless, there are opportunities to be had during volatile times. For example, a well-known American investor secured an equity stake in a large investment bank through preferred shares, paying 10% when the stock price had halved from its high a year previously.

On the corporate front, one of the largest banks in the U.S. recently acquired one of the industry’s premier wealth management, capital markets and advisory firms to create one of the largest financial services companies in the world—at a price well below the firm’s worth when its shares peaked in early 2007.