‘Humans are bad at predicting stuff’: How MLC’s Armitage navigates market uncertainty

Jonathan Armitage is more than happy to admit the coronavirus took him by surprise.

But the truth is, MLC’s chief investment officer had a plan in play well before the first COVID-19 case hit Australian shores.

MLC chief investment officer Jonathan Armitage.
MLC chief investment officer Jonathan Armitage. Credit:Louise Kennerley

The possibility of a global pandemic is one of the outcomes featured in the asset manager’s ‘futures investment framework’ – a pseudo-spreadsheet of 50 potential economic futures for Australia and the world, each shaped by a range of possible market-altering events.

The onset of another Great Depression, another World War and a new Financial Crisis are on the list. Positive risks, including a resources or productivity boom, are also featured.

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Armitage, who helps oversee more than $150 billion worth of investments at MLC, says the point of the exercise is that no-one ever really knows what is on the horizon.

“Human beings are really bad at predicting stuff,” Armitage says.

“No one predicted Brexit, no one predicted, really predicted that Donald Trump would win the election. Nobody predicted that Leicester City would win the English Premier League in 2016.”

“So how do we sort of construct a process that acknowledges that, but also focuses on a range of potential outcomes and making sure that we are positioning our portfolio for when the future sort of unravels in ways that may be a little bit unpredictable?”

Armitage’s own risk antennae has been honed over a 30-year career he says has seemingly rolled from one crisis to the next.

First there was Britain’s Black Wednesday in the early 90s, when the British pound was ejected from the European exchange rate mechanism as efforts to bolster sterling failed.

“I’d left university and sort of before I formally started working was travelling around Eastern Europe backpacking… and I remember walking past a newspaper stand and there was this big headline and I was thinking ’that’s it, my jobs gone, before I’ve even started,” Armitage said.

There may be some risks around the corner that people actually haven’t had to think about for quite a long time

MLC’s chief investment officer Jonathan Armitage

He also worked on an Asian equity product during the 1997 Asian financial crisis, and had a front-row seat to the fallout from the dotcom bubble and the GFC.

“One of the reasons why I find this role really stimulating is that though there are constantly shifts and changes… it’s knowing the various inputs into making an investment decision and making sure that you’re very clear around what you think’s important or what is superfluous,” he says.

“And obviously sort of one of the big changes that anyone who’s sort of been working in this field for the last, whatever it is – 30 years now – it’s just the sheer amount of data that’s available.”

Broad range of potential outcomes

The futures investment framework was already in place at MLC before Armitage joined from Schroders in 2007, and is something he describes as “unique” in the local marketplace.

“In order to produce the best possible returns for your clients over the sort of medium to long term, it is (about) actually thinking about what may happen, rather than what we want to happen,” he says.

“It’s not necessarily getting everything… specifically accurate. It is a relatively broad range of potential outcomes. But we think that that sort of will give us plenty of information as to how we can position portfolios.”

Take for example the onset of the coronavirus in February last year.

“We did have a scenario which talked about a pandemic,” Armitage says.

“Now, that’s not to say that we had any foresight of this other than we knew that (it) would be very bad for asset prices… (and) really curtail economic activity.”

He said the MLC team had two main strategies to handle the event. The first one was not to stand still. “We needed to continue to make decisions, and make investment decisions,” he says.

Secondly, he needed to acknowledge that some of those decisions would be wrong.

“We’re going to try very hard to limit those mistakes but it is the nature of our role that we’ll do some things and they won’t turn out in the way we expected,” Armitage said.

Armitage and his team will again lean on the framework as they prepare to navigate a landscape in 2021 likely shaped by the rollout of a coronavirus vaccine.

Also coming into play will be the efforts of governments to ease restrictions and stimulus without rocking the boat too hard.

Armitage says crucial will be ensuring MLC’s portfolios participate in the economic rebound that is already underway.

“We’re sort of cognisant that first of all, certain parts of certain asset classes and certain parts of the market are looking quite expensive, they’re discounting a lot of good news,”

“And there may be some risks around the corner that people actually haven’t had to think about for quite a long time,” he says, referring to the prospect of inflation.

“We talk about both participating and protecting the portfolio at the same time. And that’s where the framework really sort of comes into its own.”

“It is not only is it sort of acknowledging that we don’t know the sort of the future that will unfold but it’s also being allied to a range of range of possibilities but also trying to remove some of the emotion and bias that we have as human beings out of the way that we think about things.”

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Source: Thanks smh.com