Markets had been weak in 2008, but the bankruptcy saw the S&P 500 lose 21.81 per cent by 15 October, and the FTSE All Share an almost identical amount.
Lehman Brothers was a major investment bank, and the unravelling of the effects of its bankruptcy on other financial institutions created a huge level of uncertainty. There was also a prevailing sense of suspicion that other dominoes would fall.
The major indices saw extreme levels of volatility for the rest of that year and well into 2009, before eventually recovering their losses.
Performance of indices 15 Sept 2008 – 15 Sept 2009
Source: FE Analytics
Bruce Stout (pictured right), manager of the Murray International Trust, said: "The year 2008 can be remembered for delivering the worst global equity returns since the Great Depression."
"Against a backdrop of deteriorating economic fundamentals and outright seizure of credit markets, the world came perilously close to systemic financial collapse.""Lehman Brothers was one of a number of banks under the weight of escalating bad debts and deteriorating capital structures, leaving governments in the West with no option but to quasi-nationalise domestic banking systems."
Jeremy Tigue, manager of the Foreign & Colonial Investment Trust, says that it was the uncertainty that made managing money so difficult in that period.
"The collapse of Lehmans was the most dramatic market event since the 1987 crash," he said. "This was not because of the collapse itself but because of the uncertainty it unleashed – who would be next and where would it end?"
"The main lesson I learnt from Lehmans is that, however bad things are, life carries on and people muddle through."
Tigue says that managers at the time had a dilemma: buy shares that already seemed extremely cheap or stay out of a market that could fall even further.
"Anyone who was brave enough to buy shares that week had a grim six months but has done very well over five years," he said.
Andrew Bell (pictured), chief executive of the Witan Investment Trust, says that this is harder than it looks it retrospect.
"Unlike the high streets, where lower prices encourage bargain-hunting, sellers in financial markets tend to multiply after market falls and buyers abound after a rise.""Nobody sounds a gong at the top or the bottom so there is no substitute for doing your own research in assessing whether to take investment risk or reduce it."
Stout says the longer-term lesson is to focus on picking robust companies even when market conditions look good.
"One lesson is the reminder to continue to focus on corporate fundamentals," he said. "2008 highlighted the enormous vulnerability that any business can rapidly experience when over-reliance on debt financing is suddenly exposed to hostile market forces."
"My task therefore is to uncover good-quality companies characterised as having experienced management, a healthy balance sheet, a business model that can weather a full market cycle and offer progressive dividend policy."
Carl Stick, manager of the Rathbone Income fund, told FE Trustnet earlier this week that he has permanently changed his investment style.
"We lost our discipline a bit in the lead-up to 2008, but now if a price is too high or a company is too leveraged, we won’t own it," he said. "It’s as simple as that."
"We had a lot of businesses that were highly geared and others which had business models which couldn't survive the impact of a crisis. We should have done better to predict how a crisis would affect our stocks."
"The focus now is not to lose money," he added. "The industry is often focused on who can achieve the most, but I think the key to being successful over the long-term is trying to make the fewest mistakes."
Data from FE Analytics shows that Stick’s fund is now narrowly ahead of its benchmark and sector over five years, although it lagged behind during most of the time since the Lehmans crash.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Richard Troue, investment analyst at Hargreaves Lansdown, says that the crisis has affected different managers in different ways.
"For some managers it has simply reinforced their principles and the importance of focusing on robust companies that have survived such events and that’s been on more investors' radars as well – the importance of having a core part of your portfolio in these types of businesses," he said.
Stout falls into this category, having always placed a high degree of importance on capital preservation.
For this reason his trust lost only 11 per cent in 2008 while the FTSE All Share fell 32.78 per cent and the MSCI World 19.81 per cent, according to data from FE Analytics.
Performance of fund vs sector and indices in 2008
Source: FE Analytics
"With a few managers, it has probably highlighted the risk of being too concentrated or having the portfolio tilted too much in one direction," Troue added.
He says that Stick and his colleague at Rathbones James Thomson, who runs Rathbone Global Opportunities, fit into this second category.
Many managers such as these have realised that investors want funds that can preserve capital when the markets go down and have rebalanced their portfolios to spread the risk and buy defensive stocks alongside their high-growth picks, Troue says.
