Since the start of the school holidays, those of us lucky enough to live in Jersey have enjoyed a wonderful summer of long sunny days and warm evenings. Aside from time on the beach, we have even been able to entertain friends with a BBQ in the garden, without the need for a fleece! Summer activities for our children, whether horse riding, learning to sail, taking up golf or honing surfing skills have been made all the more enjoyable under blue skies.
Compared to most places in the UK, living in Jersey comes at a premium. However, summers help lessen this burden, at least psychologically and the knowledge that, in an increasingly turbulent world, it is a safe place to live and bring up children makes it one that is ever more worth paying. Being confident your children are safe whilst playing is an emotion we know many, sadly, are not able to share. This said, we are conscious this mind set, in a society where health and safety has become nothing short of an obsession in some quarters, runs the danger of creating an unnatural attitude to risk. As parents, we were both quite taken by an article we read about a children’s playground in Plas Madoc (North Wales) called “The Land”. It is described as ‘a space 55m squared, with a brook running through it, where you'll see piles of pallets, a tonne of tyres, the odd upside-down boat, wheelbarrows, ladders, fishing nets, various stray hammers (courtesy of Poundland), ropes and punch bags.’
Not, at first glance, a venue where many of us would think is a safe place to play. This is, however, entirely the point. When the playground was launched in 2012, an accompanying statement read ‘When providing play opportunities, the goal is not to eliminate risk, but to weigh up the risks and benefits. No child will learn about risk if they are wrapped up in cotton wool’. According to the founders there are numerous studies that show how risk teaches children to regulate their emotions; how the shared experience of risk forms strong social bonds; how it develops the wiring of our stress response systems and attunes the cognitive and behavioural flexibility, which will serve children well in later life.
Apparently, there have been a few cuts and bruises along the way, but “The Land” has been a great success, even becoming the subject of a fly-on-the wall documentary by an American filmmaker. Play workers from across the globe have travelled to Plas Madoc for inspiration and the local council fields inquiries every day from people eager to start similar schemes. The underlying thesis of its architects is; it is wrong and counterproductive to make playgrounds too safe – a swing with bucket seat that a child cannot fall out of and spongy safety surfaces will never feature. They believe risk is inherent in how children play and consider it as simply uncertainty, not necessarily a hazard.
Reflecting on the key messages from the triumph of this project has coincided with an ever growing concern we have in our minds regarding the actions of global policymakers. Are today’s central bankers overly protective of investors, treating them like children? We believe risk should be inherent in investing – after all, the whole raison d’etre is to harvest an attractive “risk premium” and, whilst we also believe risk should be a choice and not a fate, it is wrong and counterproductive on numerous levels to make investing too safe.
Why does this matter?
Financial markets have enjoyed their summer too, particularly post the UK’s EU referendum. The result triggered a reintroduction of QE by the Bank of England, which, in turn, coincided with further stimulus from the Bank of Japan and a more dovish tone from the Fed. Consequently, more and more bonds around the world are trading with a negative yield (we are talking over $13 trillion’s worth here) in an environment where the cost of capital is being kept artificially low. Or, put another way, falsely priced. Central bankers are continuing along the track that cheap money will bring forward future demand, by encouraging households to spend more and the corporate sector to invest more. There is some evidence of the former, particularly in the US, but the latter remains scarce.
There is another school of thought about cheap money; that it leads to higher prices for existing assets offering low marginal returns. This encourages buyers of these assets to take on leverage, in order to capture the difference between the low cost of capital and the meagre, but higher, returns available. At the company level, the dramatic changes in their cost of capital has meant many can afford to make investments whose returns might be negligible, if proper interest rate hurdles were used – a misallocation of capital. Moreover, the low cost of borrowing has enabled too many weak companies to survive. As a result, investing in these companies has become artificially less risky, or perhaps, too safe.
We appreciate risk means different things to different people. What is acceptable to some – our Investment Analyst, Calum, has climbed mountains in the Himalayas (that’s him in the picture!) – is not acceptable to others. In financial markets, the level of risk taken should be commensurate with the potential rewards available. When this natural equilibrium is distorted, we believe it is sensible to be cautious and this has been our position for several weeks across portfolios. The article on “The Land” was entitled ‘Is this the perfect playground, full of junk?’. If global markets are our playground - central bankers should not be wrapping us up in cotton wool. Much like the architects of “The Land”, they should create an environment where investors can weigh up risks and benefits for themselves.
*Sources: Is this the perfect playground, full of junk? – The Guardian; RiskMatters – Allianz Global Investors; Risk Wise – Polly Morland; GaveKal.
Julia Warrander and Russell Waite
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