Our Attitude to Investment Risk is
Subjective
Formula 1
drivers take
risks when they drive in a Grand Prix
If you or I
tried to drive like them it would be considerably riskier, as we don’t have
theirs skill and expertise
So, how can
you assess you attitude to Investment Risk?
All firms
will have their own measures of risk. Some may be based on numbers 1-10,
some 1-8, some will start at “Cautious” and end at “Aggressive” etc, but
there is no one defined scale against which you can compare these - as
we say, it is subjective rather than objective!
Rather than
try to "pigeon hole" you, we will spend quite some time with you
discussing what we mean by each of these statements and telling you
what sort of areas your money will be invested in. This will be in
different proportions depending on your ages, term of investment and
objectives.
Asset Classes
90% of a portfolio’s return is derived from the underlying asset
allocation. Long term investment success depends upon holding, reviewing
and realigning, where necessary, a portfolio diversified by asset,
geography and fund.
This is no easy matter and a Cautious investor will require a different
approach to a Speculative one. For different objectives a different risk
profile and therefore investment spread, will be required.
We avoid at all costs trying to follow “flavours of the month” and
instead construct portfolios that will stand the test of time. Our
service proposition with you is to provide advice and financial guidance
over the long term, not sell you the latest fashionable fund or product.
There will be times when certain assets have underperformed and vice
versa; this is the whole point of diversification v speculation. Here
are some of the most common asset classes.
Fixed Interest
When a company or any institution wants to raise money, they can do this
in a variety of ways. One is to borrow the money from other companies
and individuals by issuing debt. Say, for example, ASCO plc supermarket
wants to raise £15M to build new stores, it could do this by issuing a
bond for ten years paying x% interest a year and repaying the capital at
the end of the term. The creditworthiness of ASCO plc would be assessed
by independent credit rating organisations and rated accordingly – AAA,
AA, BB etc. The lower the credit rating the higher the interest rate, or
“coupon”, as the company has to reward the investor for the increased
risk they are taking.
The fixed interest asset class includes both Gilts and Corporate Bonds.
Gilts are issued by the British Government and are considered one of the
safest forms of investment. Gilts provide a good diversification from
equities but returns are generally more modest. Corporate Bonds are
issued by companies. They are considered riskier than gilts but pay a
correspondingly higher interest rate to investors. Bonds tend to be
negatively correlated with equities and so provide diversification.
A collective investment scheme manager, such as a Unit Trust, will blend
many companies and different durations of bonds and gilts to further
lower risk.
Equities
When a company goes public, i.e. it becomes a plc, its shares are open
to all to buy. Shares are also known as equities. The value of the share
will be reflected in the company’s prospects for growth or earnings, or
a combination of the two. Equities are therefore more volatile than
Fixed Interest assets.
Again, a collective investment scheme manager, such as a Unit Trust,
will invest in many companies and different sectors (e.g. banks,
manufacturers, retailers etc) to further lower risk. Some funds look for
income, some for growth. Some are sector specific and some are
geographically specific too.
UK Equity
UK Equities have historically provided good returns over the mid to
long-term. However equities tend to be volatile over shorter periods and
the uncertainty over the future movements of their prices make them a
riskier investment than some other asset classes.
US Equity
These potentially offer a more
diversified portfolio than UK based equities. Exposure to the world’s
largest economy can offer the prospect of higher returns, but also a
higher level of risk than UK equities.
European Equity
Not totally correlated to UK markets and therefore providing
diversification. Many European companies pay higher dividends than UK
counterparts, plus we have the exciting addition on developing ex
Eastern Bloc countries growing their economies.
Far East Equity
Exposure to markets that historically have experienced dramatic price
movements and higher growth economies provide potential for higher
future returns. Consequently there is a corresponding higher level of
risk and short-term price volatility. Far Eastern equities also provide
diversification from UK equities.
Emerging Markets
Not totally correlated to UK markets and therefore providing
diversification. Potential exposure to smaller emerging markets can
offer the prospect of enhanced returns but a higher level of risk than
UK equities. There is a corresponding higher level of risk and
short-term price volatility. This classification includes countries such
as Brazil, Russia, India and China although the latter two are expected
to be amongst the largest economies within the next 10 to 20 years
Commercial Property
Property funds used to enjoy relatively low volatility and provide good,
reasonably stable returns over the mid to long-term. They also provide
good diversification from equities. The Credit Crunch wiped out many of
the stellar gains made in this class since 2005, but a small percentage
in this class is useful
Alternative Investments/Derivatives
Many collective investment schemes have new powers to invest using
sophisticated financial instruments to lessen volatility in portfolios.
Not all funds use these techniques and this is neither a positive or a
negative – it depends upon the fund manager’s remit and objectives.
Finally, bear in mind that overseas investments are also subject to
movements in currency exchange rates and these factors in combination
lead to above average short-term price fluctuations.
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