If a geopolitical event is of such significance – such as the UK dropping out of the EU without a deal – that it has the potential to upend a manager’s investment fund, it should cause the manager to re-think taking on greater exposure to that risk, adds Datta.
Thinking about such nebulous concepts as unpredictable events is hard. But the importance of these events means managers need to try to assess the risk.
But this does require the manager to assess the level of probability of an event occurring. And to have any hope of pinning down even a rough range of likelihoods requires managers to spend more time thinking about geopolitical risk.
Mark Bathgate’s fixed income fund at BlueBay Asset Management specialises in investing eurozone sovereign bonds. His team devotes considerable time and energy to political analysis.
“During the eurozone crisis and recovery, assessing political risk was essential,” Bathgate says. By paying careful attention to political factors, BlueBay was able to determine that the eurozone, and indeed the European Union, would survive.
Assessing political risk has now become a core part of the fund’s investment process. That risk assessment takes various forms. As well as talking to political analysts, it also talks to political journalists.
It also pays careful attention to opinion polls. Bathgate says: “Polling companies produce a lot of free useful data.” By looking carefully at the opinion polls at the time of the general election, Bathgate and his team were an interesting variance between these surveys.
Those which predicted a high turnout indicated a hung parliament would be the most likely election outcome. Bathgate says: “We thought that Brexit and the election of Trump would push voter participation, especially among the young, and so we expected those polls predicting a hung parliament to be correct.”
As well as using traditional analytical techniques , Bathgate and his managers take the time to talk to politicians directly. “Westminster is only 30 minutes from the City and it’s only two hours to Brussels by train. Nor is Washington that far away,” he says.
Social media makes it much easier to take the pulse of politicians and commentators. “Now you can follow politicians and journalists directly on Twitter, it makes it much easier to see their positions and to catch emerging trends,” Bathgate says. Yet despite the relative ease of access to politicians and political journalists, it is only a minority who make the effort. “We rarely see any other fund managers when we are visiting politicians,” Bathgate says.
But accurately assessing geopolitical risk is about more than talking to people. Bathgate says: “It’s very easy to speak only to those who share the same views as you and confirm your biases. But to be on top of political shifts, you need to talk to many people with differing views.” And you must account for your own biases in your analysis, he adds.
Banks agrees: “One of the most interesting findings in the book ‘Super forecasting’ is that people without preconceived notions tend to be better forecasters.” People who can adapt their view of the world according to new data are better at predicting the future, he adds.
