Click & Invest. Managing your investments

Transcription

1 Managing your investments

2 Building trust from the start When you entrust us with managing your money, you want to know exactly what we will do with the investments we buy and look after on your behalf. That means clearly understanding: How we will be able to work towards your investment goals Where we will invest your money What risks are involved This guide explains the key steps we take when investing your money, and answers the questions we are most frequently asked by clients both before, and while using. Our aim is to give you all of the information you need to help you make an informed decision about who to entrust with your investments. Contents Understanding your experience and goals 3 Choosing the right investment objective 4 The service 5 Thinking seriously about risk 6 Understanding risk and return 7 Choosing an appropriate level of risk 8 Selecting the right investments 9 Asset classification 10 Understanding assets at a glance 11 Strategic asset allocation 12 Tactical asset allocation 12 Fund selection 13 Benchmarks 13 Checklist - is investing right for you? 14 Your questions answered 15 Investment strategy factsheets 17 Asset Class: General Risk Warnings 22 Glossary 28 2

3 Understanding your experience and goals To manage your money effectively, we need to recommend an investment strategy that is based on your investment goals and your risk profile. So we will first need to understand: Your financial knowledge and experience, and your attitude to investing (attitude to risk) Your understanding of the risks attached to the investment service offered by Investec Your aspirations for what you need, or want, your investments to deliver over a specified period of time 3

4 Choosing the right investment objective At, our investment strategies are designed with medium to long-term investors in mind, and are therefore structured primarily to maximise the growth of your initial investment. The level of growth you could potentially achieve will depend on how well the markets perform, as well as on the level of risk you are prepared to take. Therefore the right investment strategy balances potential risks against potential returns. Whatever your investment objective, the greater return you seek, the more risk you should be prepared to take. How we determine your risk profile is explained later in this document. Please note that all of our investment strategies are growth as explained above and that we do not provide investment strategies with an income objective. 4

5 The service It is important that you understand the service offered by, which is simplified advice followed by discretionary portfolio management. This means that: will manage your investment portfolio in line with an agreed investment strategy, which has been recommended and accepted by you following our assessment of your risk profile. Click & Invest therefore, has full authority, at our discretion, to buy and sell particular investments without discussing with you in advance, and to enter into any kind of transaction or arrangement for your account, which is in line with the agreed investment criteria. What advice does offer? We provide simplified advice which is a form of restricted advice. Restricted advice means that we will only advise you on investment management, and will not advise you on other retail investment products such as life policies. Simplified advice means that we do not provide an overall assessment of your current financial situation, or take into account investments you may already hold. Working out if investing is right for you Before you decide to invest, you should be comfortable that your financial needs have been met. This means you should ensure: You have an adequate amount of money readily available as emergency funds. For example, three months worth of outgoings in cash that you can instantly access. You have sufficient and appropriate financial protection for you and your family. For example, life insurance cover if you have dependent children. You do not have existing debts that would be better repaid or reduced. For example, an outstanding balance on store cards/ credit cards. If you are unsure of any of the above, then we would recommend that you speak to a financial adviser before investing. If you would like to review any existing investments, or would like these taken into account, then the simplified advice service is not suitable for you. You should speak to a financial adviser who can look at your full investment needs. Our recommendation is based solely on the information that you have provided us with, and the amount of money you have told us you would like to invest. 5

6 Thinking seriously about risk When thinking about an investment objective, many people think first and foremost about the potential rewards. However, it is also essential that we explain the risks involved. There are three aspects to this, which you will need to consider: 1. Capacity for Loss Your financial ability to withstand a loss of capital in your portfolio: or your capacity for loss. This describes the degree of loss in the value of your investment portfolio that you are able to tolerate without resulting in a material decline in your standard of living. 2. Attitude to Risk How much risk you are willing to take in order to achieve your chosen objectives: known as your attitude to risk or attitude to investing. 3. Investment objectives How much risk you will need to take to give your investment the potential to reach your objectives: the required risk level. If you are uncomfortable with these risks then we will be unable to create an investment portfolio for you. With all of this in mind, it is vital that we fully explore and consider the different aspects of risk to ensure we recommend the best way forward for you. To help you in this process, it is worth considering the following questions carefully: How long do you want to invest your money for? Is there a particular date when you will want to withdraw your money, such as when your child starts school? How do you feel about putting your money at risk? How would you feel if some or all of it was lost, even for a short period of time? If you were to lose invested money, how easy would it be for you to deal with those losses? How, for example, might it affect your family or lifestyle? It is important you understand the main risks involved with investing with. Investing via requires you to have both the capacity and willingness to accept a degree of loss of your capital and; The risk that you need to take to achieve your chosen objectives - the required risk level - must not exceed the risk that you are willing and/or able to take. 6

7 Understanding risk and return Unlike savings that you would keep in a bank or building society account, investing involves a higher amount of risk. The value of your investment may go down as well as up over time, therefore it is important to make sure you re comfortable that you might not get all the money back that you originally invested. Chart 1 illustrates the relationship between risk and return. It is generally accepted that your chances of receiving better returns are improved if you are prepared to take more risk and you must always be able to afford to do so. It is also worth noting that portfolios constructed to be low risk do not always produce the lowest returns or pose the lowest risk to your capital. Neither do high risk portfolios always lead to the greatest returns. This will all depend on market conditions. In specific reference to investments, you may see this risk described in terms of high or low volatility. If the value of an investment moves up and down rapidly over a short period of time, it is commonly described as highly volatile. Whereas the value of an investment that moves up and down more slowly over a longer amount of time, is described as having lower volatility. Return Value Gain 0 Loss Chart 1: The relationship between risk and return Low Lower risk Low potential for loss, but also lower returns. Lower Medium Level of Risk Higher risk Potential for high return, but also higher loss. Higher Chart 2: How investments can fluctuate over time High Chart 2 shows how a typical investment can fluctuate over time. Investment B is said to be more volatile than Investment A. Investment A Investment B Time Both charts are for illustrative purposes only 7

8 Choosing an appropriate level of risk How we assess risk We have developed a questionnaire that determines your attitude to risk and capacity for loss in relation to investing. We will recommend a suitable investment strategy and portfolio for you based on your responses to this Attitude to Investing questionnaire. We offer five different investment strategies based on your attitude to investing. Low Defensive strategy Low/Medium Cautious strategy Medium Measured strategy Medium/High Adventurous strategy High Aggressive strategy 8

9 Selecting the right investments Your portfolio will contain a number of different types of investments, also called assets, each belonging to a particular asset class. At we invest in the five major asset classes. We have ordered them below as per our view of their risk level, from low to high. Further details on the risk of an asset is explained on the following page. Cash Fixed interest Commercial property Equities Alternative investments These different asset classes, and the money invested in them, carry different levels of risk and possibilities for returns; though these are not the only risks to be considered when constructing your portfolio. We also take into account a large number of other factors in our monitoring process. This is designed to ensure that concentration of risk - or having too many eggs in one basket - is controlled, and that the quality of the investment portfolio is appropriate to the investment strategy recommended. This can also be referred to as diversification. All this means that when we set up and manage your portfolio, we go to great lengths to ensure we are selecting a suitable balance of investments in order to help you achieve your objectives. In constructing your portfolio, not only do we take into account the expected risk and return from each asset class, but also the most appropriate way to invest. We undertake an in-depth analysis of each collective fund we invest in to ensure their geographical focus and management styles combine to effectively implement our investment strategy. We believe in taking a collaborative approach when it comes to selecting investments. That s because experienced researchers and Investment Managers, when supplied with the best available information within a disciplined framework, should collectively arrive at better decisions than could be expected by an individual decision-maker. Our Investment Managers and in-house Research Team therefore, work together to identify and collate our preferred lists for the different asset classes, which will form the foundation of every portfolio. 9

10 Asset classification This diagram shows the five main asset classes that we use. It also illustrates our view of the amount of risk that each asset class carries relative to the others. Listed within the asset classes below you will also find examples of some of the main types of investments that your portfolio may contain. Highest Risk Lowest Risk Money Market Funds Time Deposits Cash Cash Preference Shares Emerging Market Government Debt High Yield Corporate Dept Investment Grade Corporate Bonds Major Government Bonds Fixed interest Commercial Property Funds (investing directly in bricks & mortar) Commercial property Emerging Market Shares and Funds UK Mid and Small Cap Shares and Funds Quoted Private Equity Funds Quoted Property Shares Developed Market Shares and Funds UK Large Cap Shares and Funds Equities Warrants and Options Commodity Funds Unquoted Private Equity Hedge Funds Fund of Hedge Funds Absolute Return Funds Structured Products Alternative investments The lower the risk of an asset, the greater the certainty of delivering the expected return on your original investment, either during or at the end of its life. Typically, the lowest risk assets will be made up of cash or fixed interest assets such as bonds. These investments tend to be less volatile. However, they also provide the lowest potential returns, and therefore the lowest level of protection against rising inflation. The higher the risk of an asset, the greater the risk of losses; particularly if you should ever need to sell at a time when the markets are performing poorly. The highest risk assets might include shares in smaller companies and emerging markets or commodities, and tend to carry a higher degree of volatility. They could also potentially be difficult to sell, which could mean you having to accept a lower price for them. On the upside, these assets usually have the potential to provide the highest investment returns over time. Higher risk investments can offer the highest potential for inflation protection over time. It is also worth noting that we treat a collective investment or funds as being in the same category as the investments it contains: for example, equity funds generally behave in a similar way to equities. 10

11 Understanding assets at a glance Cash Cash normally means putting your money into a bank account, but also includes high quality liquid bonds with very short maturities, typically of less than one year. Fixed interest Fixed interest assests, such as bonds, offer a more predictable return over time but may suffer shorter-term volatility. They provide good protection against loss of capital, but, (with the exception of index-linked bonds), very little protection against inflation. Commercial property Commercial property comprises of collective funds that are invested across a range of bricks and mortar properties. These may be UK or internationally based. Both the expected returns and inflation protection characteristics lie somewhere between fixed interest and equities. Equities Equities are the stocks and shares of a company. They are individually volatile and sensitive to many unpredictable variables. As a compensation for taking these risks, a higher return than for fixed interest assets may be expected over the long-term. A measure of inflation protection should also be provided by investing in equities. Alternative investments Alternative investments are anything other than traditional investments (e.g. equities, fixed interest assets, property or cash), and can include precious metals, commodities or hedge funds. It is important to appreciate that each asset class carries its own set of risks. By understanding these risks, you can gain a clearer picture of the overall risks carried by your portfolio. Each asset carries a different degree of liquidity so buying and selling is subject to the investment timeframe. If you would like to read a fuller description of the risks that individual assets carry, please see Annex 4 of our Terms and Conditions. Our experienced Investment Managers blend the different asset classes together in our investment strategies, using both strategic asset allocation and tactical asset allocation. This is described on the next page. 11

12 Strategic asset allocation Tactical asset allocation Our research process analyses how well the five asset classes have performed in the past, as well as how we might expect them to perform in the future in normal economic conditions, together with their potential volatility. Using this information, we construct a strategic asset allocation for each investment strategy. This is the single combination of assets that we believe is most likely to achieve the portfolio s return objectives over the full investment time frame, without taking unnecessary risks. If there are material changes to your portfolio however, we will of course communicate these with you via or the website. An example strategic asset allocation for a measured investment strategy Cash We rarely experience what could be described as normal economic conditions. As a result of this, a key part of our process is to establish our preferred asset allocation to reflect, at any given time, the current and the anticipated economic climate. This is what we call tactical asset allocation, which is established, reviewed and revised by our Asset Allocation Committee. The committee is made up of members from both our Investment Manager and our in-house Research Teams. This tactical position can be set either side of the strategic position, but within additional boundaries that we refer to as corridors. We have defined these to give us the flexibility to manage your investments to reflect all likely market conditions. This creates a range for each asset class with a minimum and a maximum exposure. An example tactical asset allocation for a measured investment strategy Cash Fixed interest Fixed interest Commercial property Commercial property Equities Equities Alternative investments Alternative investments % of total portfolio % of total portfolio For both of these charts, the coloured bar represents the potential lowest and highest percentages within the portfolio for each type of asset class. 12

13 Fund selection Benchmarks Our Collective Investment Committee meets every month to review and select individual funds within each of the various asset classes. This culminates in our recommended list of funds, from which the Click & Invest team constructs and monitors each portfolio, taking advantage of any tactical ideas and special situations from our in-house Research Team that may help to enhance performance. The portfolios are invested primarily in active funds, which aim to beat their respective benchmarks. Our in-house Research Team and Investment Managers regularly meet face-to-face with fund management teams, allowing us to gain a deep understanding of each fund and its process. This gives us confidence in our ability to identify fund managers that can add value over the long-term, after costs are taken into account. The composite benchmarks have been constructed to give you an independent comparison against which you can measure the performance of your portfolio. These are made up of indices, produced by external organisations, to illustrate the performance achieved over different time scales and types of investments. Some indices you may have heard of are the FTSE 100 index or S&P 500 index. We have assigned separate benchmarks that we feel are relevant to our low (Defensive), low/medium (Cautious), medium (Measured), medium/high (Adventurous) and high risk (Aggressive) investment strategy portfolios. These benchmarks will be shown in your Investment Proposal and your Valuation Reports. These benchmarks are a point of reference and are generally representative of the underlying investments. However, your portfolio may contain some investments that are not contained in the benchmark and those that may be held in different proportions. This means that performance will deviate from the benchmark index. 13

14 Checklist - is investing right for you? Using all of the information in this document we have put together a short checklist to help you decide if investing is right for you. Do I fully understand the risks being taken to meet my objectives? With this level of risk, are my objectives and timescale realistic? Have I taken my current personal circumstances into full consideration, and thought about what might happen in the future? The value of my investments will fluctuate with market conditions. How will I feel about this? Only once you have considered all of these questions, and if you feel confident that we have identified the right investment strategy, should you make the decision as to whether to invest. 14

15 Your questions answered Below are some of the most frequently asked questions we receive about how the service works. Who oversees your investment process? At, our Investment Committee meets our Asset Allocation Committee regularly to review and oversee our investment process and the assets in which we invest. Our Investment Committee reviews our investment process and makes sure that we are drawing on the highest quality resources. This Committee comprises senior management, Investment Managers and our in-house Research Team. Each month the Asset Allocation Committee sets tactical asset allocations for each asset class. These are guided by Investec Wealth & Investment s overall view of world markets and provide timely guidance for our Investment Managers. The Investment Team also meets regularly to discuss the portfolios, and agree on the implementation of recommendations from the Asset Allocation and Collective Investment Committees. Portfolios are also analysed to ensure they are in line with the investment strategy. The liquidity of our investments also means that you can to add or withdraw cash on a daily basis. Do you have your own in-house Research Team? Yes. Our in-house Research Team includes a strong team of analysts who follow disciplined and consistent processes for the sole purpose of supporting our Investment Managers. They communicate with our Investment Managers regularly, to keep them fully informed about changes in the markets. We frequently seek out long-term investments in good quality assets. But there is also value to be found in shorter-term market movements, and we are constantly on the lookout for these opportunities. How are investments selected? Our Investment Managers draw on the expertise and knowledge of both our dedicated in-house Research Team, and our external sources. Our collaborative approach allows us to select lists of good quality assets that form the base of each portfolio. Are my investment choices limited? is a model-based service, so we select the most appropriate strategy for your risk level and objectives. The Investment Team has an unrestricted, whole of market approach for choosing investments. Who selects my investments? Dedicated Investment Managers are responsible for choosing each investment in the portfolios. They assess the latest information and draw on a number of sophisticated tools and recommendations from our in-house Research Team. How often will you review my portfolio? Our tactical asset allocations are under constant review, as are the specific investments we recommend. Each portfolio is constantly monitored to ensure that: Changes in our preferred holdings are made when appropriate It remains within the asset allocation range It contains the appropriate investments for its specific risk profile It contains a diverse range of investments, which are not overly concentrated in any particular area 15

16 How do I measure performance? Portfolio performance is available for your portfolio when your log in to your account online, and will be calculated on a total return basis which includes both investment growth and income. The calculation will adjust for any additions or withdrawals you make to give an accurate picture of the underlying portfolio return. Each portfolio has a specific benchmark constructed from a composite of widely used equity and fixed income indices. These composites represent an appropriate blend of risk assets - UK & Global Equities - and traditionally low-risk assets - conventional and inflation linked Bonds - for their respective risk levels. Will my capital be put at risk? Yes. The investment management service provided by requires you to be exposed to some degree of risk. As such, an important condition is that you must be prepared for, and be financially capable of, withstanding a loss of capital. Could I get back less than I originally invested? Yes. Investments can go down in value as well as up and a loss of value in a particular asset may be temporary or permanent. For example, a company s share price may be adversely affected by temporary market conditions even when there is nothing wrong with the business. Alternatively, its value may be permanently affected by the company becoming less profitable. The impact of short-term adverse price movements can be mitigated over the longer term, however there may be a need to realise a loss at a particular time, for example, to protect against further loss or to facilitate a withdrawal from the portfolio. How do you control risk? Our approach to asset allocation is combined with our strong internal policies around the diversification and concentration of investments. This is designed to reduce your exposure to risk, within your agreed risk profile, as much as possible. So you can rest assured that our procedures, disciplines, resources and monitoring processes are applied to all investment strategies. How secure are my investments? Assets of clients are held in our Nominee Company and are recorded to clearly indicate that they do not belong to. This ensures that in the unlikely event of the insolvency of, a liquidator would be legally prevented from using clients assets to settle the firm s liabilities. As an appointed representative of Investec Wealth & Investment, which is a firm regulated by the Financial Conduct Authority (FCA), we also follow the rules prescribed by the FCA in choosing where stock or cash will be deposited for safe keeping or custody. When it comes to cash balances, the FCA client asset rules on most occasions require us to deposit your money in a client account with a bank or other credit institution of a type permitted under the rules. The rules also require us to exercise all due skill, care and diligence in the selection, appointment and periodic review of the bank: taking into account the standing, expertise and market reputation of the bank. What happens if my circumstances change? We encourage all clients to complete our Attitude to Investing questionnaire on a yearly basis, or following any substantial changes to their financial circumstances. In the event that a recommendation for a higher or lower risk strategy is made, your portfolio can be reassigned to that investment strategy, and the relevant trades will be placed by our Investment Managers to bring your portfolio in line with your new strategy. If your results suggest that you are no longer suitable for the service, you will be prompted to close your portfolio. 16

17 Investment strategy factsheets Low risk portfolio Defensive investment strategy Structure Quality: The equity content of the portfolio will be invested via collective investments where, overall, the majority of the underlying holdings will be large capitalisation stocks e.g. companies in the FTSE 100 Index. Diversification: This strategy will be predominantly invested in collective funds with some direct bonds. Any underlying equity holdings valued at over 5% of the portfolio may not, in aggregate, represent more than 40% of the portfolio. Benchmark 42.5% Inflation Linked Bonds Bank of America Meryl Lynch Gilt 1-10 Years 42.5% Conventional Bonds Bank of America Meryl Lynch Gilt 1-10 Years 10% UK Equities FTSE All Share 5% Global Equities FTSE All World Excluding UK Volatility This portfolio will typically demonstrate modest shortterm fluctuations in value However, there may be some sensitivity to equity market movements, market interest rate expectations and to the change in value of other investments It will have higher volatility than a cash account and the capital is not guaranteed, which is the cost of seeking to gain an enhanced return Time horizon The nature of this investment strategy is best suited to those seeking to invest for a minimum of three years. Clients who intend to withdraw a significant proportion of their investment within this period should be aware of the increased likelihood of realising a financial loss. Low risk capital growth portfolio Capital growth investors seek a return in the form of capital appreciation rather than income. The level of capital appreciation is subject to your risk tolerance and market conditions. Although the mandate is growth, we may also buy investments which produce an income if we feel this will improve the total return for the portfolio as a whole. Income will be reinvested from time to time. 17

18 Investment strategy factsheets Low/medium risk portfolio Cautious investment strategy Structure Quality: The equity content of the portfolio will be invested via collective investments where, overall, the majority of the underlying holdings will be large capitalisation stocks e.g. companies in the FTSE 100 Index. Diversification: This strategy will be predominantly invested in collective funds with some direct bonds. Any underlying equity holdings valued at over 5% of the portfolio may not, in aggregate, represent more than 40% of the portfolio. Benchmark 25% Inflation Linked Bonds Bank of America Meryl Lynch Gilt 1-10 Years 25% Conventional Bonds Bank of America Meryl Lynch Gilt 1-10 Years 30% UK Equities FTSE All Share 20% Global Equities FTSE All World Excluding UK Volatility The potential for equity investment will mean that this portfolio may be prone to shorter-term periods of fluctuating value. However, the emphasis on capital preservation will mean that these swings will usually be lower than those seen in global equity markets. Time horizon The nature of this investment strategy is best suited to those seeking to invest for a minimum of three years. Clients who intend to withdraw a significant proportion of their investment within this period should be aware of the increased likelihood of realising a financial loss. Low/medium risk capital growth portfolio Capital growth investors seek a return in the form of capital appreciation rather than income. The level of capital appreciation is subject to your risk tolerance and market conditions. Although the mandate is growth, we may also buy investments which produce an income if we feel this will improve the total return for the portfolio as a whole. Income will be reinvested from time to time. 18

19 Investment strategy factsheets Medium risk portfolio Measured investment strategy Structure Quality: The equity content of the portfolio will be invested via collective investments where, overall, the majority of the underlying holdings will be large capitalisation stocks e.g. companies in the FTSE 100 Index. Diversification: This strategy will be predominantly invested in collective funds. Any underlying equity holdings valued at over 5% of the portfolio may not, in aggregate, represent more than 40% of the portfolio. Benchmark 12.5% Inflation Linked Bonds Bank of America Meryl Lynch Gilt 1-10 Years 12.5% Conventional Bonds Bank of America Meryl Lynch Gilt 1-10 Years 40% UK Equities FTSE All Share 35% Global Equities FTSE All World Excluding UK Volatility The potential for this portfolio to hold a significant equity content means that you should expect the shorter-term fluctuations in value to be similar to those of global equity markets Time horizon The nature of this investment strategy is best suited to those seeking to invest for a minimum of five years. Clients who intend to withdraw a significant proportion of their investment within this period should be aware of the increased likelihood of realising a financial loss. Medium risk capital growth portfolio Capital growth investors seek a return in the form of capital appreciation rather than income. The level of capital appreciation is subject to your risk tolerance and market conditions. Although the mandate is growth, we may also buy investments which produce an income if we feel this will improve the total return for the portfolio as a whole. Income will be reinvested from time to time. 19

20 Investment strategy factsheets Medium/high risk portfolio Adventurous investment strategy Structure Quality: The equity content of the portfolio will be invested via collective investments where, overall, at least 25% of the underlying holdings will be in large capitalisation stocks e.g. companies in the FTSE 100 Index. Diversification: This strategy will be predominantly invested in collective funds. Any underlying equity holdings valued at over 5% of the portfolio may not, in aggregate, represent more than 40% of the portfolio. Benchmark 15% Conventional Bonds Bank of America Meryl Lynch Gilt 1-10 Years 42.5% UK Equities FTSE All Share 42.5% Global Equities FTSE All World Excluding UK Volatility The potential for this portfolio to hold a significant equity content means that you should expect the shorter-term fluctuations in value to be similar to those of global equity markets. Time horizon The nature of this investment strategy is best suited to those seeking to invest for a minimum of five years. Clients who intend to withdraw a significant proportion of their investment within this period should be aware of the increased likelihood of realising a financial loss. Medium/high risk capital growth portfolio Capital growth investors seek a return in the form of capital appreciation rather than income. The level of capital appreciation is subject to your risk tolerance and market conditions. Although the mandate is growth, we may also buy investments which produce an income if we feel this will improve the total return for the portfolio as a whole. Income will be reinvested from time to time. 20

21 Investment strategy factsheets High risk portfolio Aggressive investment strategy Structure Quality: The portfolio may be invested wholly in equities through collective funds but may include other asset classes to a lesser extent. From time to time the underlying equity content may be entirely made up of medium and smaller capitalisation stocks e.g. companies outside the FTSE 100 Index. Diversification: This strategy will be predominantly invested in collective funds. Any underlying equity holdings valued at over 5% of the portfolio may not, in aggregate, represent more than 40% of the portfolio. Benchmark 50% UK Equities FTSE All Share 50% Global Equities FTSE All World Excluding UK Volatility You should expect that there may be considerable short-term fluctuations in the value of your portfolio. Time horizon The nature of this investment strategy is best suited to those seeking to invest for a minimum of seven years. Clients who intend to withdraw a significant proportion of their investment within this period should be aware of the increased likelihood of realising a financial loss. High risk capital growth portfolio Capital growth investors seek a return in the form of capital appreciation rather than income. The level of capital appreciation is subject to your risk tolerance and market conditions. Although the mandate is growth, we may also buy investments which produce an income if we feel this will improve the total return for the portfolio as a whole. Income will be reinvested from time to time. 21

22 Asset Class: General Risk Warnings The following General Risk Warning tables are general in nature and not exhaustive in their coverage. We may or may not deal in some of the instruments listed. In the descriptions below, risk is thought of as price volatility. Volatility is the variability of the price of each asset type, due to both daily market effects and the effect of price change due to change of corporate profitability, perceived security of capital and exchange rates. There is further information about volatility on earlier pages of this Managing Your Investments document. Asset Class: Cash Description Historic annual volatility Returns generally from Asset Class Cash Funds that are held on individual, or pooled bank deposit accounts. This asset class may also include high quality liquid bonds with very short maturities (less than 1 year) as well as money market funds. Low Income General Risk Warning The main risk in cash funds are, in the case of deposit accounts the credit risk of the banking entities involved, which is minimised by the use of pooled deposits, or in the case of very short dated money market instruments, driven by a small interest rate sensitivity and/or some credit risks. 22

23 Asset Class: Fixed Interest Description Historic annual volatility Returns generally from Asset Class Fixed Interest Fixed income, or bond investments, generally pay a set rate of interest over a given period, then return the investor s principal. They offer a more predictable nominal return over time but may suffer shorter-term volatility. They provide good protection against loss of capital, but with the exception of index-linked bonds, little protection against inflation. Sub-Group/ Region Conventional UK Government Bonds Index Linked Government Bonds Bonds issued by the UK Government, generally with a promise to pay periodic interest payments (coupon) and to repay the face value on the maturity date. Low Income As above, except the periodic coupons and face value are indexed to inflation. Low Capital & Income International Bonds Bonds issued by both Governments and Corporations in a non-sterling currency. Low-Medium Income General Risk Warning Our investment process Corporate Bonds High Yield & Emerging Market Debt Bonds issued by large individual companies with an investment grade (i.e. high credit quality) credit rating. Returns will generally come through the periodic coupon payments rather than capital appreciation. Coupons are typically higher than for similar government bonds, reflecting the higher risk of default. Bonds issued by companies with credit ratings below investment grade or from companies or institutions based in Emerging Markets. Because the risk of default is higher than for investment grade bonds from developed markets, coupons are typically higher for High Yield and Emerging Market debt. Low-Medium Bonds tend to provide a lower but more predictable overall return than equities. The interest payable on these may be fixed or variable, the former providing a greater surety of return. Bonds are issued by both governments (sovereign debt) and by companies (corporate debt). The return from a fixed income bond is dependent upon the rate of interest paid and the price paid for that bond. The market prices of bonds with different credit ratings may behave in different ways as the assessment of the economic cycle changes. The most significant determinants of the value of a fixed interest bond in the market are the financial position of the issuer and changes in the interest rate environment. In the shorter term, the market price of fixed income stocks will change in accordance with the market s anticipation of moves in interest base rates and the likely future course of inflation. We may also invest from time to time into index linked stocks. Both the interest paid by these stocks and the sum received on redemption are linked to inflation, unlike conventional fixed income stocks where both are fixed. We may choose to invest into bond funds, rather than into specific fixed income stocks. This may be for a number of reasons including diversification, income objectives and a desire to invest into bonds denominated in a currency other than sterling. Both the value of the units in a bond fund and the income received from it may fluctuate. The fixed interest process will first assess the split between index-linked and conventional bonds on the basis of the overall inflation protection available within the portfolio. We will have a set policy on the target interest rate sensitivity of the remaining bonds; the remaining decision is on how much credit risk is appropriate. This will depend on the client s income requirements and the relative pricing of the various credit bands in the market. Medium Income Income The choice between using individual bond holdings and funds depends on the portfolio size, and thus costs to the client, and where in the credit spectrum we are investing. It also depends on our judgment of the outperformance that we expect from third party providers. 23

24 Asset Class: Property Description Historic annual volatility Returns generally from Asset Class Property Commercial Property comprises collective funds that are invested across a range of bricks and mortar properties. These may be UK or internationally based. Both the expected returns and inflation protection characteristics lie somewhere between fixed interest and equities. Medium Capital & Income General Risk Warning If we invest in commercial property it will only be through funds or quoted equities. Closed-ended property funds may trade at a significant discount to underlying asset value, meaning that you may sell at a loss even if the value of the underlying assets rises. Open-ended funds are likely to underperform a rising market as they may receive a steady flow of cash for investment at ever higher values, while the illiquidity of property means that funds may refuse redemptions for extended periods while cash is raised. This will mean that you may be locked into falling prices for many months. Our investment process Property exposure is accessed through our research recommended funds. The asset class has attractive real income characteristics and helps to lower the risk of the overall portfolio. Funds can target selective areas that may be more or less exposed to the economic cycle. The weight we allocate to clients is sensitive to their investment horizon, income needs and risk target, as the funds are relatively illiquid. 24

25 Asset Class: Equities Description Historic annual volatility Returns generally from Asset Class Equities Equities represent shares of ownership in publicly held companies. Shares in these companies are listed and traded on public stock exchanges around the world. They are individually volatile and sensitive to many unpredictable variables. As compensation for taking these risks, a higher return than for Fixed Interest asset is expected over the long term. A measure of inflation protection should also be provided through this asset class. Sub-Group/ Region UK Investment in public companies listed in the UK and therefore subject to UK corporate governance standards. High Capital & Income General Risk Warning Our investment process Generally these companies will have more of a bias towards the UK than international peers. However, given the global nature of many large companies, around 75% of FTSE 100 revenues are from overseas. Developed Markets Investment in public companies listed in developed markets, where corporate governance High Capital & Income standards are typically relatively high and capital markets relatively deep. Emerging Markets Investment in public companies listed in Emerging markets. Corporate governance standards may High Capital & Income be relatively less rigorous and capital markets shallower when compared to Developed Markets. However, Emerging Market economies are typically growing much faster than Developed Markets. Equities are units of ownership in individual companies. By investing in equities clients will participate in the economic success or failure of the company. As a consequence a company s shares may fall as well as rise. Volatility in equity markets can change quickly and does not necessarily follow historical trends. If a company becomes insolvent the value of its equities will also fall, potentially to the point where it has no value at all. Long-term returns from equities will come from a combination of capital growth and dividend payments. We may also advise on investments in or execute transactions in smaller companies, including penny shares. There is an extra risk of losing money when shares are bought in smaller companies including penny shares. There is a big difference between the buying price and the selling price of these shares. If they have to be sold immediately, you may get back much less than you paid for them. The price may change quickly and it may go down as well as up. The equity portion of the portfolio gives our client exposure to real assets (those whose value tends to move in line with inflation) and to economic growth (via corporate earnings). Provided we have the risk budget, they typically form the core of the portfolio. Equity selection is driven by relative valuation analysis with a bias to strong and sound companies that we believe will prosper through the business cycle. On top of this client income requirements will drive specific stock selection choices. We will hold an increasing proportion of international equities the larger the overall equity allocation, as this gives us the best chance to select longterm winners via our in-house research process. The choice between direct holdings and collectives is a complex function of portfolio size, relative valuation prospects on purchase, liquidity constraints, total costs to the client and our view on the potential for outperformance from third party providers. 25

26 Asset Class: Alternatives Description Historic annual volatility Returns generally from Asset Class Alternatives Alternative investments cover all non traditional asset classes (fixed interest, equities or cash). The most common sub groups are listed below. Sub-Group/ Region General Risk Warning Hedge Funds Hedge funds can invest in a range of financial assets rather than being limited to individual asset classes. Unlike conventional funds, Hedge funds have the ability to short assets, i.e. to profit when the value falls. Medium Hedge funds are investments which employ a wide variety of trading strategies in order to produce returns. The strategies vary enormously from fund to fund and may include borrowing money in order to seek to increase returns of investment (known as gearing), the use of derivatives to either increase or reduce risk and the short selling of securities. As a consequence the overall risk of each fund varies considerably. In addition to risks arising from the strategies of hedge funds there are also risks that arise from the regulatory environment in which the fund is based. Many hedge funds are domiciled in overseas locations where the style and quality of regulation differs from that in the UK. As a consequence the funds may be subject to different disclosure requirements. This may result in funds being able to make changes in their strategy that have considerable impact upon the investor without necessarily disclosing them publicly. Funds of hedge funds will usually have greater liquidity than their underlying holdings. However, management fees may be high and include a charge for performance above a predetermined level. These high charges may reduce reported performance and may lead the managers to seek higher returns than might otherwise have been expected. A large seller may also distort the price to the detriment of other unit holders. Since a fund of funds buys many different funds which themselves invest in many different securities, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall underlying holdings. The fund s management team is often small and hedged funds only offer infrequent opportunities to sell, monthly being typical but six month lock ups or even annual are not unusual. Capital Sub-Group/ Region General Risk Warning Sub-Group/ Region The pricing of closed-ended funds of hedge funds and single manager hedge funds is subject to market forces and may be at a premium or discount to the underlying net asset value. It is therefore possible that you realise a loss on the investment even though the underlying assets have risen or that smaller falls in net asset value are magnified into substantial falls in share prices. Private Equity Funds Shares of ownership in private companies, managed by specialist teams. Managers typically take an active role in the management of portfolio companies, seeking to improve returns and often employing high levels of debt. Holding periods are therefore typically longer than for public equities. Private equity funds hold investments that are not quoted on recognised exchanges. The valuation of these holdings may be highly subjective and may not reflect the price at which the investment is ultimately sold. Potential returns are dependent upon prices that have to be paid for acquisitions and those that are achievable when selling. There may be times when it is not possible for funds to sell investments at prices they believe to be acceptable. Private equity funds may also utilise high levels of gearing, which may increase the volatility of returns and may increase the risk of failure. Structured Products Structured products are investments designed to meet a specific return profile over a defined period by packaging bank bonds with derivatives strategies. They typically have a degree of capital protection and can make a positive return in a variety of market conditions. High Low-Medium Capital Varies 26

27 Asset Class: Alternatives General Risk Warning Structured products is a general term to describe investments which provide exposure to a wide range of asset classes through a combination of financial instruments (typically including zero coupon bonds and/or derivatives) brought together to provide a single investment product. The nature of the financial instruments included in a structured product will depend upon the type of exposure being sought by investors. A structured product should be considered as a term investment, where the expected returns will occur at or shortly before maturity. In the time before then, the price of the product may not reflect changes in the underlying assets and in certain cases will initially be more sensitive to changes in the price of the issuer s bonds. The market price of the structure will also be affected by rises and falls in volatility and by market interest rates. One of the main risks when purchasing a structured product is the credit risk of the issuer. A zero coupon bond typically makes up much of the asset value of certain structured products and the price of this bond will vary according to the issuers credit rating and market perceptions of its creditworthiness. The nature of the zero coupon bond may also mean that holders of capital protected products may face losses if forced to sell before maturity of the structure and may be locked into low returns for the life of the product if the price of the underlying asset fails to perform as anticipated. Holders of structured products may also lose if the issuer of the derivatives in the product were to default. The derivatives that make up a structure are very rarely actually purchased on the exchange. As a result, if the issuing counterparty were to default then the derivatives involved in the structure would effectively be written off and it is likely that the holder of the product would be considered to have no rights to these derivatives. Certain structured products are dependent upon the performance of an index or indices, so that a fall in the index or any of the indices below a pre-determined level may result in irrecoverable losses. Buying structured products in the secondary market may also create a number of additional risks. Capital protection, where applicable, is only applicable to the price at launch and secondary purchases may therefore be liable to large potential losses. The Taxation of structured products may be yet to be determined and it is possible that products that we believe to be liable to capital gains tax could in future be taxed as income or subject to further change. Sub-Group/ Region General Risk Warning Sub-Group/ Region General Risk Warning Our investment process You should be aware that the real value of any capital protection may be reduced by inflation. Structured products are not suitable for investors with no capacity for loss. Infrastructure Investment vehicles which have paid for the right to construct and manage very long term infrastructure projects (e.g. schools or roads). Contracts are generally either explicitly backed or subsidised by the government with payments linked to inflation. Infrastructure can only be accessed through funds that invest in a variety of projects such as schools, hospitals and roads over a defined region. The underlying volatility of the projects are usually high, but the fund manager smooths the fund volatility through diversification. Investors receive a managed income stream in return for accepting a medium level of price volatility driven by changes to supply and demand and by the political environment. Commodities Investment in physical commodities or financial contracts linked to their value. Commodities have no income stream attached to them (compared to a coupon for a bond or a dividend for equities) so returns are entirely from capital. Returns from commodities (including precious metals), either through funds or direct investment, should be expected to be highly volatile. Commodities pay no income and are thus completely subject to patterns of buying and selling in the market. Factors that may influence these patterns are the global economic cycle, production patterns, shifts in the futures markets, currency movements, extreme weather and the performance of other assets, including equities and bonds. Medium Our favoured alternative investments provide attractive real income streams, exposure to lowly correlated assets and to markets such as currencies where we rarely take specific house views. We also favour defensive equity structures, that offer partial equity upside for lower overall risk and significant downside protection. This broad category includes commodity funds and gold. High Income Capital Exposure is via funds and in-house researched structures. The main drivers will be client income requirements, the need to reduce overall portfolio volatility to meet client risk preferences, liquidity considerations and whether we can see value in both the assets and the external managers ability to add value in third party funds. 27

28 Glossary Asset class A category of assets, such as stocks, bonds, cash or property. Bond or fixed interest investments A bond is when an investor lends money to a government or company, in exchange for regular interest payments, as well as future repayment of the original amount lent. Collective fund A fund is a pooled investment vehicle which brings money together from multiple investors. A collective fund could include unit trusts, investment trusts and OIECs. Commodities Commodities are a physical substance, such as food, grains, and metals, which are interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Diversification Diversification is a risk management technique which means the portfolio is made up of a mix of different types of investments. Emerging markets An emerging market is a country whose economy is progressing towards becoming more advanced, usually by means of rapid growth and industrialisation. Income Money received on a regular basis from investments. Index linked bonds An index linked bond is a bond in which payment of income on the investment is related to a specific price index. It also provides returns which will beat inflation. Indices This can also be referred to as a stock market index. It is the measurement of the value of a section of a particular stock market, such as the FTSE 100 or S&P 500. Volatility The extent to which asset prices or interest rates fluctuate over time. Volatility is often used to assess the potential risk associated with an investment. 28

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