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Chatfeild-Roberts: Stochastic modelling tools are outdated

Jupiter multi-manager head John Chatfeild-Roberts believes the majority of stochastic modelling tools used by IFAs will be obsolete if the UK remains in an inflationary environment for the next few years.

He says stochastic models have been based on the disinflationary markets of the past 30 years and a continued inflationary environment would “call into question the investment decisions driven by those models”.

He says: “I believe most of the stochastic modelling tools available online are based on disinflation. Stochastic models suggest how you should invest based on past data. If they use the data from the last 30 years, the outputs will assume the continuation of a disinflationary environment.”

Chatfeild-Roberts highlights bonds as an example of how stochastic modelling could fail in the new environment.

He says: “The yield on US treasuries is used as the risk-free rate but if you have a significant degree of inflation, then arguably that is not a risk-free rate at all. Instead, you are actually just having your money whittled away by the robber in the night, inflation, which is taking away your real purchasing power.”

In January, the FSA warned advisers against relying on risk-profiling tools after identifying weaknesses in nine out of 11 tools that it reviewed.
Skerritt Consultants head of investments Andy Merricks says: “These models cannot cope with fundamental changes in markets.”

Whitechurch Securities managing director Gavin Haynes says: “These are traditionally actuarial-based models that focus on looking in the rear mirror. Gilts are traditionally seen as a risk-free model but in inflationary markets that is not the case.”


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Bill Gross dumps $28billion of US T’s.
    Inflation is here to stay – you cannot print vast quantities of unearned money and be surprised when inflation is the result.
    make your own mind up.

  2. Mark Hayes-Newington 10th March 2011 at 11:23 am

    Some of the arguments in this article are at best brave. UK in consistent disinflation since 1980? Stochastic models don’t understand inflationary experience, in spite of becoming popular at time of highest inflation in 21st century? US T Yield is used as the risk free rate for UK models? Stochastic Models don’t use forward looking estimates of return? The FSA report looked at online tools, not at investment processes of which tools are only a subset? Models are not developed and optimised based on experience? Stochastic models cannot and do not show inflation risk in cash or gilts?

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