Why risk management is critical to producing competitive returns through the cycle

In a wide-ranging discussion on market volatility and investment decision-making, Moneyweb editor Ryk van Niekerk and Hlelo Giyose, chief investment officer of First Avenue Investment Management, explore how investors and fund managers are navigating an unusually uncertain environment.

Giyose introduces the concept of “choke points” as central to understanding market risk, describing them as obstacles that restrict progress, much like narrow shipping routes in global trade.

In investment terms, these choke points manifest as market crashes, sharp corrections, or structural shifts that can severely impair portfolios if not properly managed.

Giyose explains that portfolios must be “seaworthy” enough to pass through such periods. Without adequate risk management, investors may suffer large drawdowns or even permanent losses.

In the current environment, a major choke point has been the rise in equities of precious metals and basic materials. Yet their correction will also serve as a choke point for adulterated holders of these equities.

Investors who benefitted from earlier commodity rallies but failed to assess downside risk potentially face damage to their strategies and products if risks associated with such high beta equities are not well managed.

Looking back to the period of quantitative easing and the Covid-19 stimulus, Giyose says unprecedented liquidity fuelled risk-taking – and drove strong performances in resources and precious metals in particular. Investors who were underexposed to these sectors lagged badly and faced lengthy recovery periods.

Between 2022 and 2023,  interest rates rose 11 times, Russia invaded Ukraine, and more recently, disruptions to global trade and global security arrangements have created new choke points and increased demand for assets such as gold.

Against this backdrop, risk management has become essential.

The aim, Giyose argues, is not to eliminate volatility entirely, but to avoid extreme cycles of substantial gains followed by severe losses.

At First Avenue, this is achieved through a portfolio structure built around three pillars:

1. High-quality companies that deliver long-term compounding;
2. Turnaround opportunities where value has been eroded but recovery is possible; and
3. Cyclical assets that address global systematic risk, such as gold.

While these categories may appear contradictory, their low correlations with one another allow the portfolio to deliver smooth returns across various choke points.

Giyose emphasises that high-quality companies form the backbone of wealth creation, while turnaround stocks require deep pattern recognition gained over years of experience.

Exposure to global systematic-risk assets must also be selective, focusing on well-run businesses even in difficult sectors.

The objective is not to outperform in every market cycle, but to avoid being left far behind during periods of severe uncertainty.

Turning to fund selection, Giyose highlights First Avenue’s use of concentrated portfolios and its focus on achieving strong returns with lower volatility. Investors, he says, should question advisors about track records, portfolio construction, and how managers respond to changes in market structure.

Learn more about the First Avenue SCI Focused Quality Equity Fund here.

Finally, Giyose cautions that reducing risk too aggressively carries an opportunity cost, particularly when investors miss strong rallies.

In periods of uncertainty, money often flows into cash or offshore assets rather than into local equities.

Balancing risk and return, he says, remains the central challenge in volatile markets.

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.