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.

Home / Press Centre / Five risk factors to consider as 2016 progresses

At a time when bearishness is spreading like wildfire through the markets, portfolio and market risk analysis is essential, says Eoin Murray, Head of the Investment Office at Hermes Investment Management.

After considering five key risk categories, it is apparent to us that markets are at a critical point, with the stability of correlations and heightened event risk being headline concerns.

Troubled times: Global markets began this year by bucking a trend. Usually buoyed by the so-called ‘January effect’, this time markets around the world slid on growing concerns about China’s economy, the oil price and the future path of interest rates. Investors are anxious and fear that this rout, following the volatility of last August, marks the start of a bear market. In this environment, it is vital for investors to be aware of the risk in their portfolios, as the distributions of asset returns are likely to change.

Five key measures of risk: Within the Hermes Investment Office, we consider at least five forms of risk, with several indices contributing to our view of each. These are as follows:

Volatility has undoubtedly increased given recent events. Even before the turmoil began, key indices showed that volatility was rising in equity and commodity markets and that it was only falling among currencies. Forward-looking indices indicate that investors should expect more frequent spikes in volatility. While these surges create uncertainty, they could also present opportunities for active investors to take advantage of rapidly changing prices.

Correlation risk can often be an imperfect measure, as it reflects either a long or short-term view, rather than a nuanced combination of the two. It is also problematic during periods of market stress of the kind being experienced now, in which correlation levels can change rapidly before reverting at a later date. One way to address this is to use the standard deviation of the correlations between asset classes, which shows the stability and, importantly, the historical reliability of correlations. This measure indicates that although correlation risk was relatively subdued throughout 2015, it appears to be very unstable and is likely to change rapidly as we progress into 2016.

Stretch risk reflects the likelihood of a ‘snapback’ for an asset class, where medium-term trends have masked longer term risks and volatility levels. Commodities are a good example of this, as relatively gradual falls in prices over the last couple of years have lowered volatility and failed to reflect the likelihood of an acute rise or fall in prices. This pattern has been evident in several asset classes amid an oscillating macroeconomic environment, making us extremely wary of mean reversion. Relative valuations between certain asset classes also appear stretched and should be monitored closely.

Liquidity risk measures currently reflect little of the turmoil in markets. Both funding and liquidity risk sit at pre-crisis levels, suggesting that liquidity is reasonably good in money markets and not critical in the credit markets – at least for now. However, trading volumes have been consistently low in the last year and liquidity, by its nature, is transient, meaning it can quickly evaporate when it is most needed. We believe that investors should be concerned about liquidity risk across asset classes in 2016, particularly since there is a possibility of contagion.

Event risk has proved to be particularly prescient in the last month, as evidence of the slowing Chinese economy and the rise in interest rates in the US prompted successive falls in the markets. Event risk is best assessed by two measures: turbulence and absorption. Turbulence refers to ongoing periods in which all or almost all assets behave uncharacteristically, while absorption refers to the ability of the markets to absorb shocks, therefore gauging susceptibility to systemic risk.
In the last year, markets behaved fairly typically, with fluctuations similar to those in most other years. However, the absorption ratio rose steadily from mid-2015 onwards, peaking at the end of the year. This is problematic, as the lack of turbulence could mean that the market has failed to price in the risk of a sudden sell-off.

Contagion: A further complication is the correlations among crises in different regions. Historically, crises have usually emerged in one market before spreading to others and then abating slowly. In 2015, local shocks did not become global, with only the August panic showing some signs of contagion. At the time, the policies of central banks were near-identical around the world throughout the year, which could have helped contain shocks. However, further tightening of US monetary policy by the Federal Reserve and the resulting policy divergence could increase the risk of contagion.

Mixed picture for messy markets: The risk profiles of the markets are particularly mixed. While they have behaved relatively normally over the last year, and could continue to do so, it is clear that the risk of a sudden shock is high. The current absorption ratio suggests that markets would be vulnerable to such an event, with liquidity risk potentially spreading across asset classes and correlations changing rapidly. From this analysis, the case that diversified portfolios are currently more risky than they initially appear to be is strong, particularly where they rely on negative correlations to reduce risk.

The views and opinions contained herein are those of Eoin Murray, Head of the Investment Office and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products.