What We Can Learn from How Professionals React When Their Portfolio Loses Value

UK investors are currently experiencing symptoms that look and feel like a split personality. The global economy appears to be headed for an economic recession, brought on by the turbulent rise in commodity prices due to the armed conflict between Russia and Ukraine.

Such growth in prices will likely choke economic growth that was beginning to take hold in countries recovering from the devastation of the Covid-19 pandemic.

While a democracy (or apparent democracy) invades another, in a brazen act not seen since the 1940s, the stock markets have barely reacted.

Sure, the FTSE 100 has certainly suffered as investors wake up to the reality of war, but falls have been relatively mute in proportion to other disasters and major conflicts in the last few decades.

This implies that investors are caught between fear and hope, wondering whether the conflict will reach an amicable resolution or whether it may escalate into a disaster of epic proportions across Europe.

How have investment professionals reacted?

A bright but troubled future for energy firms

We can look to the established wealth management companies for guidance when the financial markets show such confusing outcomes.

The Investec experts believe that the UK energy price cap will rise to £3,000, effectively allowing a massive increase in gas and electricity bills for UK households.

This will slam poorer households with costs they can ill-afford, but this relaxation in the price cap will act as a lifeline to an energy industry that has seen over 40 energy firms hit the wall due to rising input costs.

The fact that a cap remains, however, will still expose energy firms to the risk of seeing their margin squeezed between a cost they cannot control and a price they cannot raise.

Following sanctions and cutting losses

Many asset managers have taken the decision to dump Russian investments for pennies on the pound to completely exit from the emerging market.

Asset manager Fidelity has taken an approach of steering clear of all Russian equities on risk and ethical grounds.

This is mostly a pragmatic decision – the value of Russian firms have been highly volatile since the onset of the invasion and exiting this asset class will immediately reduce the volatility of portfolios.

Stock exchange and forex bulls and bears

At the same time, major index providers such as FTSE and Dow Jones have been mulling plans to remove Russian firms from their headline indexes. This technical decision will lead thousands of index-tracking funds to unload their holdings to mirror the new composition of the index.

Investment managers are also pointing to their decisions to step away from Russia as a partially ethical decision too. Many of their investors, would not want to own the equity of Russian businesses, particularly those with close ties to the Kremlin, and are putting pressure on stock-pickers to sell those companies before the investors threaten to move their money to funds that already have. It’s a matter of survival for funds to keep in step with investor demands.

Going against the general rule of thumb

Overall, the response of professional portfolio managers to the current crisis has been to ‘cut and run’ from afflicted Russian equities and bonds. Nobody wants to be seen to be speculating for a profit on Russian instruments or to be indirectly financing the Russian side of the war.

Therefore, while selling investments after a price fall is ordinarily discouraged, asset managers appear to be setting down the rationale for why this period of intense selling is an exception to the rule.

This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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