Australia’s Michael O’Dea on why investors looking to minimize risk have few places to turn.
O’Dea was interviewed by Morningstar’s Glenn Freeman via email. His answers have been
edited for length and clarity.
1. Which risk component do you think most investors underestimate?
Many investors manage risk according to how they feel rather than their capacity to take risk. Emotions have no role in making good investment decisions. Not taking enough investment risk when you are young is as threatening to your long-term financial wellbeing as not appropriately managing sequencing risk in the years approaching retirement. The twist today is that central banks have kept interest rates extremely low, which makes fixed income, the conventional way to manage sequencing risk, less effective. Therefore, those investors who can least afford to take risk have few places to turn.
2. What is the biggest risk weighing on your mind right now?
The waning efficacy of monetary policy and the rise of populist politics. Meanwhile, the investment industry is accustomed to managing relative returns at a time when it should be more focused on managing absolute risk in order to help people enjoy a comfortable retirement.
3. What’s the biggest misconception about Australia’s economy?
Since the financial crisis, some global (and local) investors have held grave concerns about
the risk of an imminent housing market collapse. Despite high prices relative to other countries, the housing market has, at least to date, shown remarkable resilience.
4. Where are you finding your best ideas?
We are always looking for intelligent ways to protect the portfolio from unforecastable events. For example, while we have a constructive positioning in equities, we also hold gold, U.S. dollars, put options, and we are short the Chinese renminbi.
5. Are Australia’s banks undervalued?
Australian banks are fairly valued provided bad debt provisions remain modest. The rise in
Australian bank bad debts over the past 18 months has been limited to corporates, particularly those in the energy and resources sectors. However, high housing prices and the increase in household leverage since 2009 are clear risks to the banking sector.
6. What profession would you have picked if you hadn’t
gotten into portfolio management?
Twenty-plus years ago, I considered being an army helicopter pilot.
7. Window seat or aisle?
A window seat on long haul flights (easier to sleep) and aisle for short haul flights (easier to get off).
8. What is the one thing you miss about Australia when
you leave its borders?
I miss (and this is assuming my family is traveling with me) getting a great cup of coffee
and the beach.
9. What book is on your nightstand?
“Burial Rites” by Hannah Kent. You know at the start how it ends, but it’s gripping anyway.
10. When it comes to analysts, is an MBA or a CFA
Either is a bonus, but first I look for attributes which can’t be taught: ethical purpose, critical thinking, innate curiosity, self-awareness, a mix of humility and confidence, and resilience. If I can find those qualities, then I see it as my job to help them reach their potential.