The Fed, the ECB, and now the PBoC have unwittingly become the equivalents of survival cells and the halos of racing cars.
In the 1970s, motor racing champion Niki Lauda had a habit of mentioning that, statistically, 20% of drivers were likely to die by the end of a Grand Prix season.
The brilliant film Rush by Ron Howard, which came out in 2013 – or, if we’re going to be a touch chauvinist, the documentary Live Fast – Die Young by Men Lareida (2005) – looks back on the extraordinary life of Jo Siffert, the great driver from Fribourg, and illustrates this spine-chilling statement perfectly.
Until the 1990s, which witnessed the death of Ayrton Senna on 1 May 1994, and also that of Roland Ratzenberger two days before that, death prowled the paddock, and the drivers adapted their behaviour and racing style under the shadow of this omnipresent threat. The battle on the track was gruelling and bitter, but each driver obeyed the unwritten code of conduct to try to keep both himself and his competitors safe.
This chivalrous code gradually lapsed more and more in the 2000s, though without disappearing altogether. Once safety became the hobbyhorse of the motor racing authorities, and the FIA in particular, F1 cars were made safe. The survival cell in the cockpit along with the halo and a host of other innovations that are invisible to the naked eye has changed the nature of the sport.
Today, after a crash, the driver generally walks away from the car unharmed. This means that some drivers of the new generation do not respect the tacit agreement that previously ruled, as the feeling of being almost completely safe makes them take risks recklessly and with impunity.
Some of the young generation who haven’t experienced the increased risk of losing their lives while driving will therefore take risks that are extremely (too?) aggressive and out of step with the racing code of Lauda or Prost.
High return, low risk
A major private banker once said to a famous racing driver: “You and I do essentially the same job: we decide on a risk threshold before battling it out to deliver the best possible performance without ever exceeding the risk level we set at the start – otherwise it’s the end of the road!”. This analogy corresponds perfectly to the idea of credit bond management that we applied.
It is delusional and dangerous to think that we will always be shielded from a fatal accident, protected by central banks.
Since the financial crisis of 2008-2009, central banks have resorted to first conventional and then unconventional financial weapons to ‘save the world’. Their efforts have been extremely successful, surpassing our most ambitious expectations, yet there has still been some worrying collateral damage as a result.
Some – fortunately only a small number – of the new generation of bond fund managers are no longer afraid of the risk of defaulting, or even of risk per se. In view of this, what justification is there for continuing to base a management process on rigorous risk management that, ultimately, can ‘scupper’ performance? This technique would mean getting rid of most of our risk management tools and rushing headlong towards anything that offers ultra-high yields and, if possible, added leverage.
The argument of managers who are adept at this new way of looking at portfolio management is simple – even simplistic: accidents have become a rarity because, if there is an issue, the central bank will come to the rescue and we shall be protected. If we had to quote an example to support this theory, recent events can provide us with the perfect case study: the Chinese juggernaut Evergrande.
The Fed, ECB and now the PBoC have unwittingly become the equivalent of F1’s survival cells and halos, prompting a handful of fund managers to practice a hyper-aggressive management style. Prior to 2008, we had management without the safety net and, even if the risk might appear to be less visible today, it remains ever-present.
It is delusional and dangerous to think that we will always be shielded from a fatal accident, protected by the central banks who, supposedly, will have learned their lesson since Lehman Brothers. Our management team will never let its guard down and sacrifice its risk management models solely in order to score a few performance basis points for which we might have to pay very dearly.
As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.
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The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 06/12/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.