Leslie Budd: Michael, how are models from portfolio theory useful in practice in advising your clients on the allocation of investment assets?
Michael Morley: What we try and do in the private client world is really two things. First of all we try and understand what the purpose of the particular pot of money is that we’re trying to manage, and secondly we try and understand what the tolerance for risk is. So when it comes to portfolio optimisation, I think that clearly that has a role. The portfolio manager will be looking to optimise relative to the investment objectives that a private client has set, which will be related in turn to the purpose of the pot of money, but I think actually even more important than that is attitudes to risk, and the single most important question that I always ask private clients is how much are you prepared to lose. Understanding the capacity for loss it turns out is I think in the long run more important than portfolio optimisation.
Leslie Budd: Okay, thank you. Is there a cultural difference in attitudes towards risk? For example Anthony Bolton has lost some money on his new
Michael Morley: I think there is a different attitude to risk in the sense that if you are looking at emerging markets from the perspective of a developed market that appears to be a significant risk in terms of managing away from your core portfolio. So the likelihood is you're going to manage that in the context of your overall strategic asset allocation; it may turn out to be quite a small component of what it is that you have under management. When you actually move into an emerging market, and you start advising clients who live and operate and have grown up in that emerging market, that is their base market. So it doesn’t actually feel very risky to them when they're considering investing in assets in those markets, but I think in a global context it turns out that from a passive perspective actually the attitude is quite different.
Leslie Budd: And finally, has the growth emerging markets, particularly high net wealth individuals, provided a challenge for a private bank that had a reputation of being conservative, solid and has a long history?
Michael Morley: I don’t think so. When we have gone outside the
Leslie Budd: I think that’s very interesting and insightful distinction. Michael Morley, thank you very much.
Michael Morley: Thank you.