26 Jan 2018 2 min read

Adding science to investing in an uncertain world

By Emiel van den Heiligenberg

We live in an uncertain world. With Brexit, Chinese growth and US policy just three of countless risks facing the ongoing bull market in risk assets, this is as true today as it ever was. So what’s an investor to do?


Philosopher Bertrand Russell allegedly said that “the objective of science is to teach how to live without certainty, and yet without being paralyzed by hesitation”. In doing so, he inadvertently highlighted an important parallel with the world of investing. There is always uncertainty with investment; the key is to recognise this, but not be paralysed by it.

With markets having had a stellar start to 2018 and sentiment very bullish, many investors appear to have thrown caution to the wind. Economic and financial risks used to be at the forefront of minds, but more recently the big consensus trades – long equities, short bonds and short US dollars – have all worked like a charm.

"There is always uncertainty with investment; the key is to recognise this, but not be paralysed by it"

Discussions in the World Economic Forum have highlighted members’ collective fears that inequality is sparking dangerous social fractures like populism and geopolitical tensions. We couldn’t agree more and have discussed these issues at length in Anger managementPopulist allocation and Should investors be worried about US-China relations?

The chart below shows the different permutations in which increased populism can show itself (and in many cases already has). We see this as an important roadmap for future shifts in policy and expect that these measures will become increasingly popular in the years to come.

So how can we invest without being paralysed by fear?

In this uncertain and complex world, scenario thinking is an important piece of any investment toolkit. It helps investors to be more proactive, more adaptable to change, and better prepared. It also makes a quick response to adverse outcomes easier and allows action (such as installing hedges) to prevent very negative potential scenarios.

"Scenario thinking is an important piece of any investment toolkit"

We do three kinds of scenario exercises in the Multi-Asset team:
  1. Re-run historical disaster scenarios
  2. Think up new possible tail risks
  3. Determine which mainstream scenarios are not our base case

The last of these is to reflect the fact that there is no such thing as a single base case with a very high probability; there is a range of possible outcomes around the base case. This kind of thinking helped us particularly well in case of the EU referendum and the US elections. Even though our base case was wrong, we were well prepared, as discussed in The future ain’t what it used to be.  

We believe Bertrand Russell was right. While the saying attributed to him was referring to the world of science, he might as well been talking about investing. And for us, scenario planning helps add science to investing, in an inherently uncertain world.

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg