Interview with Julian Morrison by Zilla Efrat

Most people understand that investing in shares involves some risk. Yet their definition of risk seems to vary widely.

Many fund managers view risk as the chance of volatility in the sharemarket or a divergence from a benchmark (tracking error). But, as with many things, fund manager Allan Gray has a different view.

“We look at risk very much from a business owner’s point of view,” explains National Account Manager, Julian Morrison.

“It’s the risk of investing your capital and not getting it back or not getting a decent return on it.”

Morrison notes that risk, as per his definition, can’t be precisely quantified. But people love to quantify things and they end up using volatility as a measure of risk.

The problems with using volatility as a risk measure

“Investment product providers obsess with volatility and often, when they talk about risk and returns, they will show graphs highlighting the volatility of stocks or indices. Today, you can also invest in a range of low volatility funds which purposefully screen and rank stocks by their level of volatility. So your investment is focused on volatility, rather than true risk as we see it.

“But we know what volatility is. It means that asset prices can move around a lot. If you focus on the movement in the share price, however, you will worry about how things are moving around, rather than the underlying value of your investment. That’s not a helpful way of thinking about a long-term investment.”

Using a theoretical example to highlight the problem with volatility as a measure of risk, Morrison says: “If a share falls one per cent every day for a year, its measure of volatility may be very low. Yet it’s a dreadful investment.”

He notes that fund managers, and more importantly financial advisers, need to be mindful of volatility as a form of risk, not because volatility itself is a risk, but because of what volatility does to the behaviour of investors.

“The real risk of volatility is it causes people to do the wrong thing at the wrong time. For example, if a share is moving upwards and lots of people get excited, the risk is they will bid against each other and pile in at prices higher than the share is worth.”

Or they could have a kneejerk reaction to negative or positive news in the market, such as North Korea’s latest threat, or a shock election result in another country.

Morrison observes: “While it’s important for our team to be aware of macro events like these, we don’t believe we have any edge over anyone else in knowing what they mean. Everyone is in the same camp in terms of uncertainty.”

Think like a business owner

He says that instead we should focus on individual companies and their fundamentals, thinking and behaving like a business owner, rather than a share trader.

“Stocks are traded every day and you can watch their price jump around. But if you owned a private business, you would not try to work out its saleable price every day or every minute. Instead, you’d be much more focused on growing it, ensuring its revenues are sustainable over time, keeping costs down and mitigating its risks through the business cycle.”

Like most private business owners, Morrison says Allan Gray’s thinking is very long-term. “How a share performs over the short term is less important than what it’s worth over a long period of time. In fact, if it performs poorly over a short period of time, we might take advantage of that and buy more of it at the lower price, if we still believe it’s attractive.”

While the average period for an investor to hold an ASX-listed share is around one year, he says one year is not a long-term proposition.

“We don’t believe people can consistently forecast a good outcome over one year when things are so uncertain,” he says.

“One advantage of our investment philosophy is that we are much more patient than most. If we’ve identified a stock we like and it’s not cheap enough, then we will wait until, and if, something happens to make it cheap enough.

“And because we go for companies that may be overlooked by the rest of the market, we may have to wait until they start to attract interest again before their value is realised. Our investment approach means we have the luxury of time.”


Julian Morrison holds a Bachelor of Arts (Honours – University of Sheffield) and the Chartered Financial Analyst designation.