A few weeks ago , during a private conversation with the director of a well known private bank based in Madrid, we talk about a topic I think is worthy of this reflection shaped post . That was pretty much the conversation :
The banker in question I came to ask what we were supporting our clients' assets more conservative. He was referring to the parts of financial portfolios that are not likely to be placed in bag , since volatility is not usually let investors sleep peacefully . Decorated indiscreet question by arguing that in this year 2013 is living your life more complicated in terms of investment recommendations to their clients.
I asked him if he really seemed this year more difficult and complicated than the second half of 2011 . Surprisingly he said yes , because he said , " all assets are expensive (sic ) " .
Obviously referring to bonds in general, as I prefer not to think that this directorazo also referred to the bag, knowing that there are excellent companies at derisory prices (eg Russian oil ) , and that there are investment fund managers that Cheap business succeed consistently investing . His concern mingled with confusion between risk and volatility (I recommend rereading Why call him when they mean Volatility Risk ? . Anyway, this reasoning was left too loose , this and any banker , however director who is , and I assume correctly that what he meant is to find alternatives to fixed income equivalents developed in the traditional Old Normal, in which the bank has been supporting life.
His existential question was where to shelter the money from your customers used to have low volatility in exchange for small but steady increases in their portfolios , repeating over and over: " .. is that now all assets are expensive .. " . Actually what worried him was to find an alternative to German Bunds (no risk of permanent losses ) but minimally decent yields , which igualasen at least inflation. Although that is pasture real long-term inflation , believe not asking for more .
This revered manager recognized me - only in small committee - that the Spanish fixed income , and generally peripheral , not enough risk premium paid to its customers, to offset the risk of permanent loss is assumed in these issuers insolvent . This recognition for its part, is progress that honor , if not because it debases the fact reserve it for " privacy" , and do not explain it and explain its employees to all Customers , as would be expected in all ethical and honest advisor .
What happens is that , not knowing how to find a clear alternative , most lucid bankers (because most anchors still believe that peripheral bond is secure) prefer to stick with traditional guidelines obsolete , rather than recognize their uncertainty and disability , which Customers can make them lose . And that is what we seek to avoid at all costs, because he recorded with blood and fire as they reached the banking world , some still beardless .
The said manager told me that longed for the time when the risk premium was 500 points (! ) , " Because at least at the time the return paid in part the intrinsic risk of default on peripheral bonds " (! ) . I replied that although the risk premium multiply x2, x3 or x4 ever performance to compensate the risk taken its Customers. And I had to remember that we were talking about their customers more cautious , since your initial question was where to shelter the money of shareholders more conservative. How could then consider taking the risk of Spanish bonds , even though they had high returns in portfolios whose obsession should be the long-term preservation of any ultimate loss ? No risk premium , 'I said , however high it may be, to compensate accept a permanent loss to such customers. He grudgingly acknowledged and automatically returned to his existential doubt a mantra : "So where can you get eses money, everything being so expensive? "
My answer was clear and concise . These more conservative profiles should invest exclusively in fixed solvent , even though the circumstances of this New Normal force us to take it to greater volatility . And the creditworthiness of issuers of both countries and companies , is currently only in certain emerging economies. It is true that investors must take swings in their prices much higher than they paradoxically have American or European bonds (not peripheral ) . But the security of payment at maturity is the North than ever ( and now less than ever) should lose more conservative investors . Unfortunately today rentiers must choose between the regularity of income and investment security .
The banker argued that some of its customers would not understand these price swings , and who only feel comfortable with lower volatilities as developed fixed income , despite its insolvency makeup. I replied that indeed our work of all consultants , mentalizing is so patient and persevering to our customers , to understand that no longer serve the investment parameters of Old Normal, where security was synonymous not only certainty to avoid permanent loss , but also of low volatility. And now we must prioritize the safety of not suffer unrecoverable losses , to the low price fluctuations and yields .
Something misplaced argued that , if he did that , several customers would leave to other entities whose bankers are prometiesen the placidity of old, even if only a dangerous illusion. And that would serve the business to the competition on a silver platter ... At this point I had to spit out something that bothered him to hear: " It is better to lose to Customers Customers ' money ." I also told him that putting the interests of investors in the long run will also benefit the financial institution. I know it sounded like Mandarin and I sinned from naive to try to save his soul , but I like to think that if only briefly , saw the light.