Is there a risk premium for being willing to fail unconventionally? Or, in plain English, potentially looking stupid after the fact? Coutts is looking for alternative sources of alpha, which could mean to paraphrase John Maynard Keynes, being willing to fail unconventionally or, as Coutts’ CIO UK translates, capturing the ‘stupidity risk premium’. Valentina Romeo reports.
"Whilst it’s not our central scenario, clearly buying Russian equities is the kind of strategy that others would argue would have the potential to make us look somewhat stupid," says Coutts’ Alan Higgins.
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One of the aims of the CIO is to focus on selected investments that many investors consider too risky alongside a conventional asset allocation approach, he tells PBI.
He says: "In our business there are two ways to fail, either failing conventionally or unconventionally. Consequently alongside a more traditional asset allocation in the Coutts multi asset funds other investments include 100-year Mexican bonds, Russian equities, oil infrastructure partnerships, CLO equity, Russian bank bonds and owning Italian bonds (as opposed to calmer times now) when Berlusconi was in charge and in the headlines."
Recent corporate indicators and economic data suggest a more stable outlook for earnings and growth in Russia.
"With respect to Russian equities then sizing the position becomes important to reflect high volatility and additional tail risks because if you are wrong, you can very quickly lose 20-25%," Higgins says.
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By GlobalDataThis approach has helped Coutts balanced multi asset fund return 5.1% YTD to end August after rising 9.2% in 2013.
Russian equities have long been cheap, reflecting political risks and perceptions of corruption, but the current ratio of prices to earnings forecasts (forward PE) of around 4 is low even by historical standards – its lowest since the credit crisis, says Coutts’ latest investment outlook.
Furthermore, Russian equities are also cheap on an asset basis, with prices relative to book value (net assets) at 0.7, compared to 2.1 for MSCI World.
