We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.


The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Prepare to be surprised – 6 risk measures taking the temperature of a raging bull

Home / Press Centre / Prepare to be surprised – 6 risk measures taking the temperature of a raging bull

Eoin Murray, Head of Investment
20 November 2017

In the latest Market Risk Insights, How to evolve in the new investment climate,  Eoin Murray, Head of Investment at Hermes Investment Management, checks the temperature gauge and identifies risks investors should consider as we progress through the fourth quarter.

The year may be almost at an end, but 2017 still has the capacity to shock. The shift from one monetary regime to another is unlikely to progress without convulsions in the market. In our consistently-held view, the current calm – reflected in low volatility and generally benign conditions – may hide deeper market vulnerabilities that could catch complacent investors.

To remain ahead of the risk curve, we measure forward-looking ex-ante risk from as many angles as possible. Our models, built on the ever increasing piles of patterned data produced by the apparent chaos of daily market moves, help us discern likely hazards ahead. The following is a synopsis of the key findings.

Volatility risk: Why markets may get the UMP

Across the board, long-term implied volatility measures continued to drop for all asset classes over the quarter, with currency and commodity volatility dropping most rapidly. Equity and bond volatility eased off at a less precipitous rate. However, the tranquil surface could hide emerging disruptive forces – including economic, political and financial leverage risks – that may cause a splash before year end.

Most importantly, sustained low implied volatility can lull investors into gearing up portfolios – or via other techniques to ramp up exposures – in order to supercharge returns. Given that we anticipate further shocks with sharp surges in volatility, those same investors will be forced to cut their positions, leading to self-reinforcing position-shedding.

Eoin Murray, Head of Investment, Hermes Investment Management: “How the markets react to the unwinding of Unconventional Monetary Policy (UMP) is crucial. This, alongside rising global political unrest, means we can expect forward-looking gauges such as the VVIX to flicker upwards over the rest of 2017. We also anticipate markets will retain the effects of volatility shocks more deeply in their collective conscience (long memory will return).”

Stretch risk: Why investor can’t be sure of the floor

Stretch risk allows us to identify assets that trend in one direction for a considerable period of time. A ‘stretched’ asset typically features suppressed headline volatility that obscures true underlying risks.

Valuations can become stretched without the appearance of increased volatility. In this scenario, assets or markets become extremely cheap or expensive through continual small price movements. However, such valuations rarely persist.

Murray continues: “Overall, we can find examples of stretch risk in both equity and bond markets, either from a momentum or extreme valuation perspective. The injection of liquidity from unconventional monetary policy has led to an unstable floor for downside risk, which we see continuing to develop in unpredictable ways throughout the remainder of this year and well into next. In the face of greater leverage as a result of lower volatility, we can only hope that the inevitable unwind will be orderly.”

Correlation risk: Prepare to be surprised

Correlation assumptions underpin most asset allocation and investment strategies. Indeed, investors depend on the assumed relationship between asset classes to manage overall portfolio volatility risk.

Unfortunately, correlation is not a fixed quality, requiring us to closely monitor the subtly-shifting dynamics of asset class relationships over time. Over the last few decades, the range of investment options has multiplied across asset type and geography. In this process, portfolio construction and risk management techniques have become increasingly homogenous.

Because of this convergence investors tend to react in a similar fashion when faced with the same new information, increasing the gap risk in correlations. We anticipate sharp movements in correlation, which can be managed by combining different portfolio construction and risk management methods.

Liquidity risk: Contained but under pressure

“Liquidity is often the first casualty of any market dislocation. Dislocations can occur even in highly-liquid markets. By identifying ‘crowded’ trades, we are better able to identify potential trigger sources of liquidity risk. We believe concerns over liquidity risk in the corporate debt market remain highly relevant”, said Murray.

As in our previous Market Risk Insights we include the Hui and Heubel ratio for Bund futures: this measures intra-day price movement relative to traded volume scaled by either market capitalisation or open interest.

The ratio shows liquidity conditions remained relatively stable during the quarter, with the usual number of illiquidity spikes. However, it remains moot whether years of low rates and quantitative easing have eroded the ability of central banks to counter downturns. If so, should liquidity dry up, confidence could likewise evaporate abruptly. As we have maintained, liquidity will be the most likely transmission mechanism for contagion should any significant shocks upset the current market détente.

Event risk: Mood moderates despite the radicals

“Our global policy uncertainty indicator reached a 16-year peak around Brexit, only to be surpassed by a new high around the time of the US election. The metric has declined substantially since then, as the prevailing view appears to be that markets can remain immune to political uncertainty but not so to its economic cousin. Despite the sanguine market take on geo-politics, there are flashpoints aplenty – notably North Korea and Brexit, while populism is back on the agenda in Europe”, said Murray.

Regardless of the multi-jurisdictional pop-up political crises, investors remain buoyed by slowly improving macro statistics suggesting a global economy on the mend. However, event risk, incorporating political and policy uncertainty, is a constant feature of financial markets. Our principal metrics for capturing it, the Turbulence Index and the Absorption Ratio, are at moderate levels and broadly in agreement.

ESG risk: Are monetary incentives undermining carbon targets?

A study that grabbed our attention examines efforts by firms to meet ambitious carbon emissions targets. With a novel dataset compiled by the Carbon Disclosure Project (CDP), the authors found that while using stretch goals alone was effective, the addition of monetary incentives/bonuses seemed on the whole to undermine the achievement of those targets.

Studies like these give us strong clues about how to analyse the relative riskiness of company strategies to address climate change through corporate behaviour modification.

Another case of history repeating

History suggests that economic data surprises have far greater capacity to spook markets than geopolitical risks – central banks will need to tread carefully as they attempt to ‘normalise’. In this environment, we would encourage investors to shy away from any complacency implied by benign risk measures.

Murray concludes: “If we are indeed headed for a correction of some sort, then understanding your investment timeframe is paramount: depending on how your portfolio is adapted to your investment horizon may well represent the difference between calamity and opportunity if risk runs wild.”

Our full analysis of the investment environment can be found in the current issue of Market Risk Insights

Share this post:
Eoin Murray Head of Investment Eoin is Head of Investment and a member of Hermes’ senior leadership team. Eoin also leads the Investment Office, which is responsible to clients for the investment teams’ consistent delivery of responsible, risk-adjusted performance and adherence to the processes which earned them their ‘kitemarks’. Eoin joined Hermes in January 2015 with over 20 years’ investment experience. Eoin joined from GSA Capital Partners, where he was a fund manager. Before this, he was Chief Investment Officer at Old Mutual from 2004 to 2008 and also held senior positions at Callanish Capital Partners LLP and Northern Trust Global Investments. He began his career as a graduate trainee at Manufacturers Hanover Trust (now JPMorgan Chase) and subsequently performed senior portfolio manager roles at Wells Fargo Nikko Investment Advisors (now BlackRock), PanAgora Asset Management and First Quadrant. Eoin earned an MA (Hons) in Economics and Law from the University of Edinburgh and an MBA from Warwick Business School. Eoin is a Freeman of the City of London, and a Liveryman of the Worshipful Company of Blacksmiths. He is a member of the Exmoor Search and Rescue team, a fully qualified Swift-water Rescue Technician and a Flood Water Incident Manager.
Read all articles by Eoin Murray

Find posts by author

  • Alex Knox, ACA
  • Amy Wilson
  • Andrew Jackson
  • Andrew Parry
  • Claire Gavini
  • Dr Michael Viehs
  • Emeric Chenebaux
  • Eoin Murray
  • Geoffrey Wan, CFA
  • Harriet Steel
  • Ilana Elbim
  • Jonathan Pines, CFA
  • Joseph Buckley
  • Kimberley Lewis
  • Louise Dudley
  • Mark Sherlock, CFA
  • Martin Todd
  • Maxime Le Floch, CFA
  • Michael Russell, CFA
  • Michael Vaughan
  • Neil Williams
  • Nick Spooner
  • Nina Röhrbein
  • Peter Hofbauer
  • Philip Nell
  • Saker Nusseibeh
  • Silvia Dall’Angelo
  • Tatiana Bosteels
  • Tim Crockford
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • risk

Press contacts