What is a “prudent man” to do?  by Harold AGJ Davis in Winnipeg,  January 19, 2018

  The Prudent Man Rule has defined fiduciary responsibility in the United States since 1830, but it could it overwhelmed by commercial considerations in 2018.

Wikipedia provides a quick summary of the rule as directing trustees “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”

With equity indices currently now rising more than 2% per week or at an astonishing pace set to more than double the value of common stocks in less than a year, can institutional investors afford to be prudent? Fund reputations and retail investor decisions are heavily biased by performance measures such as percentage return statistics. A cautious portfolio manager who questions the investment merit of the current upside momentum in stocks runs the risk of being left behind and committing a “mistake” that could adversely effect his/her reputation and career. How many are bold enough?

Professional investors will attempt to cobble together justifications for closing their eyes and continuing to hold what they have and buying more as new client money comes through the door, but obvious concerns are now mounting against automatic complacency. While the old adage holds that “bull markets climb a wall of worry”, consider the uncertainties:

• Slow economic growth
• The possible end of NAFTA
• Post Brexit shocks
• Rising interest rates and shifting monetary policy
• Heightened Asian and Middle Eastern strategic tensions
• A change within 10 months of U.S. Congressional majorities and leadership

Taken together, a prudent man should be forgiven if he/she is now concerned about “the probable safety of the capital”, not the marketing value of full participation in questionable stock market euphoria. Dare it be called “mania”?