Risks in portfolio construction misunderstood: BlackRock

Risk management is the least understood area of portfolio construction among advisers but can generate the best outcomes for clients, according to BlackRock’s Damien Mooney.

Risk, in this case, refers to a huge number of issues – inflation, change in prices, recession and even geopolitical upheaval. But despite the role that risk management plays in the world of finance, many advisers avoid discussing it with clients.

“Conversations around portfolio planning tend to anchor more on the outcomes and performance side rather than the risk,” Damien Mooney, head of BlackRock’s Aladdin Wealth Tech, told the InvestTech conference on Wednesday.

Mr Mooney believes that the lessons of the global financial crisis have faded and that risk management is no longer a priority.


“People have gotten used to more benign investing conditions and therefore this risk issue, and certainly in the context of portfolios, is not being front and centre,” he said.

But as the world continues to sink into very low and negative rate territory and markets become increasingly troubled – what Mr Mooney describes as a move “from uncertain to uncharted market conditions” – risk management will become more important than ever.

Integrating risk management into advice also provides substantially better outcomes for clients.

“If an adviser is using portfolio risk as a key management tool in their practice, it’s very, very clear that the performance dispersion of those clients in those portfolios and their outcomes will tighten,” Mr Mooney said.

“I can’t guarantee that performance will be better per se, but the way in which those portfolios are managed and delivered will be more consistent.”

Risk management is also important to clients who want a more ‘granular’ understanding of what is happening in their portfolios.

“If you don’t think risk matters then you have to believe investors don’t value transparency and are not seeking more personalisation,” Mr Mooney said.

“If your reason for not really caring about risk is because it’s too hard or too hard to explain – that’s kind of not the right answer.”

Risks in portfolio construction misunderstood: BlackRock
Damien Mooney
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