Understanding your Accel Risk Profile

Transcription

1 Understanding your Accel Risk Profile This document should not be used by a Client as a selfdiagnostic aid. It is intended for use by a Financial Adviser as part of the advice process undertaken with their clients. Clients should take no decisions on the basis of this document without appropriate advice. A copy may be retained by clients as a record of the process undertaken.

2 two Choosing an appropriate investment strategy to meet your goals Profile Through a series of questions and discussion, we will together agree an appropriate investment strategy which matches your personal risk profile. Benchmark We will then select an appropriate benchmark asset allocation, based on your personal risk profile. Your portfolio benchmark will act as a reference point for the levels of risk in your portfolio and as a guide for the person who selects your investments. Deliver An investment professional will then select a portfolio of funds with overall risk levels similar to your benchmark. They will monitor and maintain this portfolio over time to ensure the risks remain suitable for your agreed strategy.

3 three What is Risk Profiling? Risk profiling is the process by which we agree an appropriate investment strategy to meet your needs. There are three elements to risk profiling: Risk Tolerance Your psychological willingness to bear investment risk. Expressed another way, this is your willingness to accept a higher chance of a poor outcome in pursuit of a higher chance of a good outcome. Risk Capacity Your financial ability to withstand financial loss, or a fall in value of volatile assets. Think of this as the extent to which your future lifestyle would be affected if you lost all or part of the amount invested, or if the value of your investments fell temporarily because of market uncertainty. Goals and Aims The reasons why you wish to invest. You may have very specific goals, or you may just have a vague idea that you want to invest for a number of years without being certain what the money will be used for. All three factors affect your Personal Risk Profile.

4 four Advantages of Managed Portfolios Professionally managed, regularly monitored portfolio of funds. The portfolio manager will use your portfolio benchmark as their reference point when selecting funds. It will guide the asset allocation of your portfolio. The manager s objective is to maintain the risk profile of the portfolio at a consistent level although this cannot be guaranteed. Professional discretionary investment management at affordable prices. No need to agree each change or trade in your portfolio with your adviser: less paperwork, reduced cost of administration, no time lag - portfolio manager can act immediately in response to market conditions. Risk Warning: Most portfolios hold investments linked to the stock market. This means that your capital is at risk and investment performance is not guaranteed. Investments can go down as well as up. As a consequence of market conditions, portfolios may drop in value by more than the amount intended. Depending on the type of portfolio, you may lose part or all of the amount invested. Past performance is not a guide to future performance.

5 five Risk vs. Reward Volatility: Can be described as How uncertain will my returns be? As the chance of a good outcome (i.e. higher returns) increases, the risk of a poor outcome (i.e. lower returns) also increases. The volatility of a portfolio reflects the extent to which the value is likely to fluctuate, particularly over shorter time periods. High Low Portfolio Volatility Risk Indigo High Violet Low Inflation: As the level of bond/cash exposure increases, the risk of erosion of capital due to inflation also increases. Bonds Vs Equities: Portfolios are made up of various amounts of cash, bonds, equities and all other assets. As the level of equities increases and the level of cash/bonds decreases the potential return over the medium to long term will increase, but the potential risks in the short term will also increase, i.e. the portfolio will become more volatile due to stockmarket movements. Low Equity Exposure Red Blue Green Yellow Orange Portfolio Inflation Risk Bond Cash Exposure High High Low

6 six Inflationary Decay Inflation is the rise in the general price level of goods and services in the economy over a period of time. Assuming an inflation rate of 2% p.a. over 10 years, the real value, i.e. the purchasing power of 10,000, will have dropped to just over 8, ,000 10,000 8,000 Real Value Assuming Zero Returns and 2% Inflation Over a 30 year period, the purchasing power of 10,000 would be equivalent to just 5,520. Value 6,000 4,000 2, Years

7 seven 10 Year Long Term Historic Benchmark Behaviour This graph shows the simulated behaviour of the Accel benchmarks over the period shown and how the potential for return varies with the level of risk. It does not reflect actual portfolio or investment performance. 100% 80% 60% 40% A B C D E F G A ACCEL GREEN GTR in GB (75.51%) B ACCEL BLUE GTR in GB (74.09%) C ACCEL VIOLET GTR in GB (72.25%) D ACCEL YELLOW GTR in GB (71.45%) E ACCEL INDIGO GTR in GB (71.33%) F ACCEL ORANGE GTR in GB (57.33%) G ACCEL RED TR in GB (43.57%) 20% 0% 20% 40% Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Dec 11 01/01/ /12/2011 Data provided by Financial Express 2012

8 eight Behaviour in a Falling Market This graph shows the actual behaviour of the Accel benchmarks over the period shown and how the potential for losses increases with the level of risk. It does not reflect actual portfolio or investment performance. 2.5% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15% A B C D E F G Increased losses Increased volatility A ACCEL RED TR in GB (0.17%) B ACCEL ORANGE TR in GB ( 0.22%) C ACCEL YELLOW TR in GB ( 2.24%) D ACCEL GREEN TR in GB ( 4.91%) E ACCEL BLUE TR in GB ( 7.14%) F ACCEL INDIGO TR in GB ( 9.35%) G ACCEL VIOLET TR in GB ( 12.56%) 17.5% 08 Jul Aug Sep /07/ /09/2011 Data provided by Financial Express 2011

9 nine Behaviour in a Rising Market This graph shows the simulated behaviour of the Accel benchmarks over the period shown and how the potential for return varies with the level of risk. It does not reflect actual portfolio or investment performance. 10% 8% 6% 4% G F E D C Increased returns Increased volatility A ACCEL RED TR in GB (0.25%) B ACCEL ORANGE TR in GB (1.60%) C ACCEL YELLOW TR in GB (3.67%) D ACCEL GREEN TR in GB (5.37%) E ACCEL BLUE TR in GB (6.52%) F ACCEL INDIGO TR in GB (7.68%) G ACCEL VIOLET TR in GB (8.92%) 2% 0% B A 2% Apr 11 May Jun Jul /03/ /07/2011 Data provided by Financial Express 2011

10 ten Peak to Trough This graph shows the actual behaviour of the FTSE 100 over the period shown and illustrates the concept of Peak to Trough performance. This is the % fall experienced between the highest and lowest points thus representing the worst possible return over a particular period, i.e. buying at the maximum price over the period and selling at the worst. The following example shows a calculated % fall between the highest point (on 12/10/2007) and the lowest point (on 03/03/2009) of 44.79%. 10% 0% 10% 20% 30% 40% A 50% Nov 07 Dec Jan 08 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 09 Feb Mar 12/10/ /03/2009 Data provided by Financial Express 2010 A FTSE 100 TR in GB (-44.79%)

11 eleven The Role of Asset Classes within a Portfolio Increased volatility Cash (Used for liquidity) Bonds (Used for income) Equities (Used for growth) Cash investments involve money placed on deposit with large financial institutions. The capital will not grow, but interest may be paid. Interest payments are often below the rate of inflation and so cash investments can shrink in real terms over time. They are ideal for security because the value should not fluctuate, but they are poor for growth. They are generally considered to be secure investments. In very rare cases cash investments can suffer losses due to bank collapses or defaults. Bonds are loans made to either a government (called Gilts in the UK) or to a company ( Corporate Bonds ). They pay a fixed annual rate of interest unless the government or company defaults. Unlike cash, the value of bonds can rise and fall unpredictably. Normally these fluctuations are lower than those experienced by equities. Bonds are a compromise between the security of cash and the uncertainty of equities. Equities (often called shares ) represent part ownership of a company. The investor shares equally in the profits of the company with other shareholders; risks are similarly shared. If a company goes bust, shareholders will often receive very little (or even none) of their money back. Over the longer term shares have exhibited the potential to grow at a high rate. The dividends they pay have also tended to keep pace with inflation over the longer term*. Share prices fluctuate daily, sometimes wildly. These are more risky investments for those looking for growth. *Barclays Capital Equity Gilt Study 2010 Alternatives (Used for diversification) This category covers everything that isn t equities, bonds or cash. It can include physical property, commodities, hedge funds, structured products and other specialist investments. The risk and return potential of these securities all differ, but from time to time it may be beneficial to replace some of the equity, bond or cash holdings in a portfolio with alternatives.

12 twelve Benchmark Asset Allocations Benchmark % Cash % UK Government Bond % UK Corporate Bond % UK Equities % Emerging Market Equities % Developed Market Equities Red Orange Yellow Green Blue Indigo Violet The above benchmark asset allocations represent the expected long term positions for each risk profile. Actual asset allocations may vary from this on a short term basis.

13 thirteen Red Portfolio As a Red investor, Accel s lowest risk category, you will prioritise protection of your nominal capital above all else. You are not willing to expose your investment to stock market risk at all. The red portfolio asset allocation is 100% cash with no exposure to either equities or bonds. This will be suitable for you as your primary investment objective is capital security. Your approach to investments could be described as: if you invest 1, you require 1 back. Cash-based investments may pay interest, but this may be below the rate of inflation and the result is reduced value or purchasing power of cash over time. Your portfolio will be focused on maintaining cash and avoiding nominal losses. This asset allocation could be regarded as the most secure of all but there are slight risks of losses due to very rare events such as bank collapses and defaults. There is no guarantee of future performance. Portfolios may drop more in value than intended. Benchmark Asset Allocation: 100% Cash/Money Market Instruments (diversified for credit risk) Cash 100%

14 fourteen Orange Portfolio Benchmark Asset Allocation: As an Orange investor you are mostly trying to protect capital, but would like a chance of growing your assets a little, perhaps by enough to keep pace with inflation over the longer term. You are willing to expose your investment to the risk of small losses, say up to 5%. The orange portfolio asset allocation is mostly cash (approx. 60%), but also includes some bonds (approx. 30%) and a small amount of equities (approx. 10%). This will be suitable for you as, while you seek to prioritise your capital security, you would still like a small amount of growth. The large cash element is likely to provide the security whilst the other assets, especially the equities, may offer some scope to keep pace with inflation over time. Overall fluctuations in value should be small. The asset allocation for the orange portfolio has been determined by using the past performance of similar assets, allowing for an additional margin to further mitigate against the risk that the maximum loss may exceed an acceptable percentage of loss. Based on historical data the orange portfolio would have experienced a maximum peak to trough loss of 4.32% over the last ten years (Source: Financial Express Analytics, 2012). There is no guarantee of future performance. Portfolios may drop more in value than intended. Developed Market Equities 4% Emerging Market Equities 1% Cash 60% UK Equities 5% UK Corporate Bonds 15% UK Government Bonds 15%

15 fifteen Yellow Portfolio Benchmark Asset Allocation: As a Yellow investor you are seeking modest growth from your portfolio, perhaps by enough to see a real return over and above inflation over the longer term. You are willing to accept the risk that you may lose less than a fifth of your investment, say 20% or less. The yellow portfolio asset allocation holds some cash (approx. 20%) and increased weights in equities (approx. 30%) and bonds (approx. 50%). This is suitable for you as you require some growth, but you are still seeking to limit potential falls by holding less than half your portfolio in the riskiest asset classes (i.e. equities). The asset allocation for the yellow portfolio has been determined by using the past performance of similar assets, allowing for an additional margin to further mitigate against the risk that the maximum loss will not exceed that intended. Based on historical data the yellow portfolio would have experienced a maximum peak to trough loss of 14.03% over the last ten years (Source: Financial Express Analytics, 2012). There is no guarantee of future performance. Portfolios may drop more in value than intended. Cash 20% Emerging Market Equities 3% Developed Market Equities 12% UK Government Bonds 25% UK Corporate Bonds 25% UK Equities 15%

16 sixteen Green Portfolio Benchmark Asset Allocation: As a Green investor you are looking for real returns from a portfolio that balances risk and reward. You are willing to accept the risk that you may lose slightly less than a third of your investment, say around 27%. The green portfolio asset allocation aims to balance riskier investments, i.e. equities (approx. 50%), with less risky investments, i.e. bonds (approx. 45%) and cash (approx. 5%). This is what is typically known as a balanced position. The asset allocation for the green portfolio has been determined by using the past performance of similar assets, allowing for an additional margin to further mitigate the risk that the maximum loss will not exceed that intended. Based on historical data the green portfolio would have experienced a maximum peak to trough loss of 23.04% over the last ten years (Source: Financial Express Analytics, 2012). There is no guarantee of future performance. Portfolios may drop more in value than intended. UK Government Bonds 23% Cash 5% Emerging Market Equities 5% UK Corporate Bonds 23% UK Equities 24% Developed Market Equities 20%

17 seventeen Blue Portfolio Benchmark Asset Allocation: As a Blue investor you are biased more towards seeking returns than avoiding risk and you will want the opportunity to benefit quite substantially from rising stock markets. You are willing to accept the risk that you may lose up to a third of your investment i.e. 33%. The blue portfolio asset allocation increases the weighting in equities (approx. 65%) in search of higher levels of growth. The rest of the portfolio is held in bonds and cash; these assets have the potential to offset any falls in the equity market over time. You will need to be content with this level of volatility. The asset allocation for the blue portfolio has been determined by using the past performance of similar assets, allowing for an additional margin to further mitigate the risk that the maximum loss will not exceed that intended. Based on historical data the blue portfolio would have experienced a maximum peak to trough loss of 28.95% over the last ten years (Source: Financial Express Analytics, 2012). There is no guarantee of future performance. Portfolios may drop more in value than intended. UK Government Bonds UK Corporate 16% Bonds 16% Cash 3% Emerging Market Equities 7% UK Equities 32% Developed Market Equities 26%

18 eighteen Indigo Portfolio Benchmark Asset Allocation: As an Indigo investor you are looking for growth potential significantly in excess of inflation over the longer term. You are willing to accept the risk that you may lose up to a half of your investment i.e. 50%. The indigo portfolio asset allocation is heavily weighted towards the riskiest asset class (equities at approx. 80%) and retains only a small amount of bonds and cash (approx. 20%). This is quite an aggressive portfolio aiming for higher levels of growth. It is suitable for you as you are prepared for large falls in value and are willing to hold on for the longer term. The asset allocation for the indigo portfolio has been determined by using the past performance of similar assets, allowing for an additional margin to further mitigate the risk that the maximum will not exceed that intended. Based on historical data the indigo portfolio would have experienced a maximum peak to trough loss of 34.43% over the last ten years (Source: Financial Express Analytics, 2012). There is no guarantee of future performance. Portfolios may drop more in value than intended. UK Corporate Bonds 9% UK Equities 40% UK Government Bonds 9% Cash 2% Emerging Market Equities 8% Developed Market Equities 32%

19 nineteen Violet Portfolio Benchmark Asset Allocation: As a Violet investor, Accel s highest risk category, you are looking for the full benefits of investing in shares over the longer term and will not normally hold any lower risk assets. You are willing to accept the risk that you may lose a significant proportion and potentially over 50%. The violet portfolio asset allocation is virtually all equities (98%). This is the portfolio with the highest potential for growth, but it also experiences the highest falls in line with the equity market. It is suitable for you as you are aggressively seeking growth and are content to tolerate the associated levels of volatility and potential high level of loss. The asset allocation for the violet portfolio has been determined by using the past performance of similar assets, allowing for an additional margin to further mitigate the risk that the maximum loss will not exceed that intended. Based on historical data the violet portfolio would have experienced a maximum peak to trough loss of 40.47% over the last ten years (Source: Financial Express Analytics, 2012). There is no guarantee of future performance. Portfolios may drop more in value than intended. UK Equities 49% Cash 2% Emerging Market Equities 10% Developed Market Equities 39%

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