A decade after the generally-accepted start of the global financial crisis and as markets continue to deal with its fall-out, some of the industry’s top professionals have revealed the lessons they learned from the historic series of events.
On 9 August 2007, French bank BNP Paribas signalled the start of the crisis by suspending subscriptions and redemptions from two funds with heavy exposure to the US sub-prime market. In the following months, the credit crunch intensified and markets were hit with heavy losses in 2008.
Below, fund managers and investment professionals highlight what they have learned 10 years since the onset of the crisis.
Central banks responded to the crisis by launching massive quantitative easing programmes originally designed to boost liquidity, but Ashburton Investments chief executive Steve Kelso said investors now need to prepare for more volatility as preparations begin to wind these down.
He said: “The by-product of quantitative easing, combined with ultra-low interest rate policies, has been the dampening down of volatility.
“However, with volatility at the lowest levels in modern history, the frequency and amplitude of volatility spikes is likely to increase moving forward.
“We are now in an environment of interest rate hikes, for the first time since the end of the crisis, while the other monetary policy efforts are set to begin unwinding.
“We would argue it has been the abundance of liquidity, rather than any economic expansion, that has played the major part in the sharp rise for asset prices over the past decade.”
Volatility spiked in the immediate aftermath of the financial crisis, as the below chart shows. More recently, however, it has remained subdued.
Performance of VIX over 10yrs
Source: FE Analytics
Kelso said the combination of high leverage ratios and low volatility was a “dangerous cocktail for investors” in an environment of rising interest rates.
“Leverage is a friend for investors as long as volatility stays low, but is dangerous if it reverses,” he explained. “Severe volatility on a leveraged portfolio has often led into the territory of stop losses and fire sales to meet margin calls. This is what occurred in 2008 and at the end of every other investment cycle.”
Hartwig Kos, co-head of multi-asset at SYZ Asset Management, said the biggest lesson he had learned was that the status quo “must always be challenged”, noting that many had assumed mortgage bonds were “boring and safe”.
Kos (pictured) said nobody had imagined that half of Wall Street’s banks would disappear nor that the Federal Reserve would become one of the largest purchasers of the US bond market, adding that further examples of “reality interrupting received wisdom” had emerged more recently. 
“All of this is further hard evidence that to be successful in navigating financial markets, one has to be open-minded and look port as well as starboard when watching out for gathering storms,” he explained. “But this is not all: one must remember that asset class characteristics and asset class relationships may dislocate dramatically in a rapidly changing market environment.”
Hermes Investment Management co-head of credit Mitch Reznick agreed, adding that investors should not be complacent and should particularly remain disciplined about valuations.
“This need not undermine the ability to deliver superior risk-adjusted returns,” he said. “Instead, investors should embrace a flexible approach to investing. From a credit investor’s perspective, if you have the ability to invest under more broad-based mandates, there is no need to chase risk to deliver returns.”
Reznick said it was “imperative” that investors learn to construct portfolios from the “building blocks carved out of valuation anomalies” particularly in the credit market.
“By not being a forced buyer of anything, it allows a portfolio manager to mitigate the suffocating downdraft of being caught in a crowded trade when sentiment turns against that particular over-bought corner of the market,” he said.
One lesson for David Osfield, manager of the EdenTree Amity International fund, was the lack of oversight and governance structures that contributed to the failure of banks during the crisis.
“The underlying premise of ‘waiting for the music to stop’ appears rooted in short-term objective setting and inappropriate remuneration frameworks,” he said.
“A key lesson for investors remains that management behaviour, and hence company strategy, will be primarily driven by the underlying reward structure.”
Osfield said a focus on appropriate governance structure comes from its belief that superior long-term performance can be achieved through sustainable and responsible investment.
“In this vein, we aim to identify multi-year sustainable trends with greater certainty and predictability, than forecasting short-term global macro-events, such as monetary policy or political outcomes,” he said.
“Post the global financial crisis, investors are increasingly embracing this concept, but it requires a shift in mind-set beyond the short-term to a new era of profits with principles.”
Meanwhile, Evenlode Investments chief investment officer Hugh Yarrow said the decade since the financial crisis has highlighted the importance of self-sufficient growth against a challenging economic backdrop.
“Companies have not been able to rely on a 'rising tide to lift all boats’, and even businesses operating in the most stable, rational industries have needed to move with the times and continue to evolve business models and adapt to innovation and new entrants,” he said.
“Many of the most successful businesses during the period – as with any period – have had the competitive position, cultural willingness and financial strength to invest consistently in their long-term organic futures through both thick and thin.”
One outcome in the immediate aftermath of the financial crisis was the collapse of the open-ended property fund sector, but Cohen & Steers president and chief investment officer Joe Harvey said that the funds have returned to popularity in the UK.
Performance of index vs sector over 10yrs
Source: FE Analytics
“Investors often have a tendency to forget, or perhaps hope things will be different next time. The harsh reality descended on direct property fund investors in 2016,” he said. “Less than a decade since the global financial crisis, the UK market again witnessed the mass freezing of property funds on the surprise UK referendum outcome. It took many months before these issues were resolved.”
Harvey said that it was time to recognise the “inherent flaw of these vehicles” and to embrace Reits in the same way as other developed markets.
As the above chart shows, performance of the listed property fund sector has been stronger than the average IA Property fund, returning 193.05 per cent against the latter’s 75.02 per cent.
Lastly, the past decade has also highlighted the need for investors to think about their investment decisions at times when conditions can change dramatically.
Eoin Murray, head of investment at Hermes Investment Management, said that while policymakers had reacted quickly and drastically to the unfolding crisis, “they must now move from crisis management to crisis resolution” in a similar fashion.
“The extraordinary measures seem to have created severe distortions in capital markets, while the purported benefits for the real economy are under question,” he said.
“It was never realistic to expect that unconventional monetary policies would lead to conventional outcomes. We now find ourselves at the beginning of an era of low natural interest rates, and investors should carefully consider their strategic asset allocations in response.
“The importance of getting these decisions right, as well as the value of good active management, has never been more important.”
Darius McDermott (pictured), managing director at Chelsea Financial Services, said the firm has started to include understanding debt levels of underlying holdings as part of its fund research, given some of the problems some overleveraged firms faced during the financial crisis. 
“We now have a greater emphasis on company debt when researching funds, he said. “We learned that if companies have too much debt and get into trouble, there is nowhere to hide.
“Fund managers always say they like companies with strong balance sheets – so we dig deeper. It is not that a company has to have no debt whatsoever, but they need to have a good capital structure and generate enough free cashflow to service that debt.”
McDermott added: “On a more personal level, I learned that you have to keep your investment horizon front of mind.
“If you were investing for the long-term when markets fell, and did not panic, you soon recouped your losses. If you were brave and invested when market had fallen a bit – not trying to time the bottom, but at some time during falls – you made money in pretty much every asset class.”