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Alex Harvey, CFA | 1 June 2020

The SpaceX Factor

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On Saturday night at 22:11 hours I was fortunate enough to see the International Space Station (ISS) blazing across the darkening London skyline at 17,000mph. For budding astronomers the Star Walk app points out where and when to look, and with it orbiting over 15 times per day you’ve plenty of opportunity to view it (the stunningly clear UK skies obviously help, as does the night sky to spot it reflecting the sun from above the horizon). The reason for my keen interest on Saturday however, was to catch a glimpse of the SpaceX rocket carrying two astronauts to the ISS, supposedly visible to the naked eye. Sadly, I failed to spot it, but I think it will go down in history as a seminal event in the history of space exploration as a private US company has for the first-time ferried NASA astronauts to the heavens.

The mechanics of space travel and earth orbit work precisely because of the predictability that the laws of physics impose on objects in space. I can roll forward literally to the year 2400 in the Star Walk app and it will show me exactly what I will see, in any direction, at any time. If only we were afforded such certainty in financial markets! The last few months are testament to the fact that we can’t control risk, but that we can and should manage for it. Like any SpaceX payload whose cargo is on a journey, the destination and time of arrival is largely known, but the path to it is full of potential hazards. Curveballs are not just earthly phenomena. NASA’s margin for error is zero which is why so much preparation, planning and testing happens ahead of any mission launch. We as investors are afforded a few more degrees of freedom, but like NASA we want to reduce uncertainty as much as possible to ensure a smoother flight and the eventual safe arrival at the destination.

In our strategic portfolio modelling we run millions of simulations to derive a long-term portfolio allocation that has the highest probability of achieving our client’s long-term investment goal. We concurrently manage for shorter-term drawdown risk which we know most clients have limited tolerance. We know that if our clients stay invested, they are likely to reach their financial goals, so it’s important they don’t de-risk at what often proves with hindsight to be a compelling buying opportunity. Of course, NASA’s journeymen have no such choice; once onboard there’s no getting out halfway through!

As well as all the pre-launch planning – akin to our strategic portfolio modelling – there is a huge amount of equipment testing and manoeuvre practising that goes into managing for the actual journey. Astronauts work for hours underwater on a replica of the ISS in the Neutral Buoyancy Laboratory (ie. a pool) at NASA’s Johnson Space Center in Houston. They plan for different eventualities to mitigate risk as much as possible when it comes to the actual spacewalk. It is not dissimilar to planning for the ‘known unknowns’ that inevitably crop up in our line of work.

Against a rapidly changing investment landscape, and with bond yields at ever lower levels, it would be unwise to rely solely on observed historical data to inform expectations about future cross asset class returns. We believe that robust scenario testing is an important tool in managing future portfolio paths that may look like past episodes, but which are unlikely to perform the same way. We cannot predict when performance will peak and trough, but we know at times it will. By keeping our eyes open to all eventualities, we stand a greater chance of not missing the proverbial rocket.

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