Reading a drawdown chart without turning a quarter into a crisis

A drawdown chart answers a narrow question: from the highest point in the window to the lowest point that followed, how far did the portfolio fall, and how long did it stay down. It does not answer whether the mandate was foolish. It does not answer whether the manager should be sacked. Those are separate papers.

We draw the path in the same ink as the return chart, on a paper-coloured field, with the peak and trough dated. If the trough sits on a month-end because we only have monthly marks, the caption says so. Daily marks make a more jagged picture; monthly marks look calmer than the weeks felt. Neither is a moral quality.

Trustees often fixate on the percentage at the trough. A twelve percent fall in a sleeve that the policy said would be equity-like is not, by itself, a breach. A twelve percent fall in a cash-plus sleeve might be. The chart cannot carry that distinction; the policy extract on the facing page must.

Recovery time is the second number we print, and we print it only when the series has actually recovered inside the window. An open drawdown at period end is labelled open. Closing the chart with a hopeful arrow is a habit we do not have.

After a sharp episode we are sometimes asked to overlay ‘2008’ or ‘2020’ on the same axes. We decline unless the mandate, the hedging, and the liquidity were comparable. Overlaying crises from another portfolio’s life is a slide, not a record.

The useful committee question is not ‘why did it fall’ in the cosmic sense. It is ‘which ten lines, in pounds, explained the path’ and ‘did any of those lines fail to price’. That is why our drawdown notes always carry a contributor table, even when the chart looks simple.