The range of factors an investment practitioner must consider when offering advice is simultaneously broad-based and very personal. Global political and economic events heavily influence investment choices on a broad scale, while on a micro level, an individual client’s environmental experiences and genetic make-up can influence their choices about stocks and return preferences.
Joachim Klement, CFA, Chief Investment Officer at Wellershoff & Partners, focuses on the more personal aspects when working with his private clients. As part of the Research Foundation Workshop for the Practitioner, Klement will provide an overview of current best practice to identify investor risk appetites, including a discussion of the techniques to identify investor risk profiles, the latest research on drivers of investor risk preferences, and how to use these findings in everyday practice.
According to Klement, the problem with traditional economic models is that they assume rational behavior. Evidence suggests, however, that humans are not always rational; that we filter our assessment of the objective reality through the lens of our personal experiences. For example, Klement cites the risk-averse preferences of clients who have lived through the Great Depression. As a financial adviser, therefore, it is incumbent to know your client investor and to accurately assess his or her risk profile. While this has routinely been conducted using the questionnaire technique, Klement believes in focusing on the client’s personal experiences in order to obtain a more precise picture. Talking to the client about their past, documenting it with the help of simple tools, and then using that information will enhance an adviser’s investment advice.
Leaping the chasm to broader factors, Philippa Malmgren of DRPM Group asserts that fund managers build portfolios on a foundation of global geopolitical assumptions. She contends that the financial markets presume a given political order, and should not be studied in isolation from politics or geopolitics.
In Geopolitics for Investors, a March 2015 monograph published by the CFA Institute Research Foundation, Malmgren discusses several important ways to map geopolitical risks, particularly those that affect valuation, pricing, and risk management. As part of the Research Foundation workshop, she will expand on the topic to discuss global shifts that change the investment landscape, why today’s strategies cannot be based on yesterday’s understanding, and more specific geopolitical factors that are vital for investors to scrutinize.
Malmgren stresses that investors need to consider the value markets ascribe to the presence or absence of geopolitical concerns. In her monograph, she discusses some key measures useful for fund managers and investors to apply when analyzing geopolitical risk, such as comparing national borders with effective national territory, and the geopolitical feature of an ecumene, a core geographical area with special significance. Moreover, a country’s dependence on commodities is another measure of geopolitical risk. Any disruption to concentrated areas in the world economy is a geopolitical event to investors.
Conflict is costly, both engaging in it and preventing it, so markets will assign a value to geopolitical order and certainty. The question, according to Malmgren, is what kind of world order increases or decreases market value? Further, there are many different versions of what constitutes world order, and these characterizations are relevant to an investor because they affect prices and markets. A central characteristic of geopolitics today is disagreement about the current world order.
Delegates attending the 68th CFA Institute Annual Conference in Frankfurt can learn more from Klement and Malmgren at the the Research Foundation Workshop for the Practitioner on Sunday, 26 April. Online registration for the event is closed, but you can follow social media highlights from the event and watch select conference presentations online.
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