Five years on from Lehman’s – what global investment trust managers have learned

11th September 2013

With the fifth anniversary of the collapse of Lehman Brothers, the Association of Investment Companies (AIC) has collated the views of three global fund managers asking what are the lessons learned?

The AIC suggests that the statistics demonstrate that holding your nerve seems key. You could put it another way don’t sell out at or near the bottom which is nearly always true (exceptions might include single share holdings such as RBS and HBoS of course)  But in general, it does appear to apply. The average investment company is up 38% over five years to 31 August 2013, despite falling 14% between 31 August 2008 and 31 August 2009 which isn’t bad through the worst financial crisis since the 1930s.

 Jeremy Tigue, Manager, Foreign & Colonial Investment Trust

“The collapse of Lehman’s was the most dramatic market event since the 1987 Crash. This was not because of the collapse itself but because of the uncertainty it unleashed – who would be next and where would it end?”

“The main lesson l learnt from Lehman’s is that, however bad things are, life carries on and people muddle through. Anyone who was brave enough to buy shares that week had a grim six months but has done very well over five years.”

 Bruce Stout, Manager, Murray International Trust

“2008 can be remembered for delivering the worst global equity returns since the Great Depression. Against a backdrop of deteriorating economic fundamentals and outright seizure of credit markets, the world came perilously close to systemic financial collapse. Lehman Brothers was one of a number of banks under the weight of escalating bad debts and deteriorating capital structures, leaving governments in the west with no option but to quasi-nationalise domestic banking systems.

“The legacy of Lehman Brothers and the overall financial crisis is a world where companies have generally restructured their balance sheets and become less addicted to capital markets. Unfortunately government balance sheets have not improved – still burdened by huge amounts of debt – and economies remain fragile against a backdrop of continued de-leveraging and anaemic growth rates. There is no quick fix and, despite some positive economic data points in recent weeks, structural weaknesses in Europe and the US prevail

“One lesson is the reminder to continue to focus on corporate fundamentals. 2008 highlighted the enormous vulnerability that any business can rapidly experience when over-reliance on debt financing is suddenly exposed to hostile market forces.  My task therefore is to uncover good quality companies characterised as having experienced management, a healthy balance sheet, a business model that can weather a full market cycle and offer progressive dividend policy. Companies trading on attractive valuations can still be found for those willing to do the work. However, economic headwinds dictate that capital preservation should prevail rather than chasing returns which at best may not materialise in this low growth environment or at worst could result in significant losses.”

Andrew Bell, Chief Executive, Witan Investment Trust

“When Lehman collapsed it threatened the whole banking system because some banks were so overstretched that, if only 2-3% of their creditors failed, it could wipe out their capital. For a few weeks, it seemed possible that global banking would collapse, ushering in a 1930s-style depression, as banks were unable to fund themselves or raise capital through the financial markets and became dependent on state aid. Equity markets were in turmoil and there was palpable fear about the outlook for economic stability, not simply economic growth. Fortunately, governments realised that the financial system’s problems would only be manageable if confidence could be restored to markets and the process of reducing leverage was allowed to take place over an extended timescale. The US realised first that restoring confidence was paramount and started to recover first. Europe was still having this debate in 2012.

“When the history books are written I think the central banks will get low marks for failing to recognise the dangers from poor credit control and high leverage levels but high marks for managing the resulting crisis and avoiding an economic calamity which would have fallen on the shoulders of people who had no responsibility for the bubble. For at least a few economic cycles, regulators are likely to lean on the banks to strengthen their finances further and banks are likely to be better stewards of their depositors’ and their shareholders’ assets.

“Another lesson is that, however bleak the outlook seems, usually the world finds a way to muddle towards a solution. Unlike the high streets, where lower prices encourage bargain hunting, sellers in financial markets tend to multiply after market falls and buyers abound after a rise. Nobody sounds a gong at the top or the bottom so there is no substitute for doing your own research in assessing whether to take investment risk or reduce it.”

Mindful view in brief: Clearly, this is from an investors’ point of view. There are obviously a host of other lessons for society. Economists will follow the herd with a few exceptions, it is very difficult to magic away the market cycle, financial markets don’t regulate themselves, we were all underwriting banks against failure but hopefully not now, politicians are not very good at slamming on the brakes when that ought to be in their job description. But we suspect, that although fund managers face a lot of flak and scrutiny, there is one lesson they have mentioned above – they are usually a lot better at their jobs when they have had to manage money in a nasty bear market.

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