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Attitude Towards Investment Risk and Return
The level of risk which you may be prepared to accept as an investor is a key consideration. Different asset classes have different risk profiles.
The table below shows how different asset classes are graded in terms of risk and reward:
The higher up the spectrum of risk you invest, the greater the opportunity for significant capital growth but correspondingly there is also greater potential for losses.
Diversification
Risk is an implicit aspect to investing: shares can fall, economic conditions can change and companies can experience varying trading fortunes. There are a wide variety of different asset classes available to invest in and commensurate risks attached to each one. Whilst these implicit risks cannot be avoided, they can be mitigated as part of the overall investment portfolio, by diversifying. By spreading your investments over a wide range of asset classes and different sectors, it is possible to avoid the risk that your portfolio becomes overly reliant on the performance of one particular asset.Key to diversification is selecting assets that behave in different ways. Some assets are said to be “negatively correlated”- for instance, bonds and property often behave in a contrarian way to equities by offering lower, but less volatile returns. This provides a “safety net” by diversifying many of the risks associated with reliance upon one particular asset.It is also important to diversify across different “styles” of investing- such as growth or value investing as well as across different sizes of companies, different sectors and geographic regions. Growth stocks are held as investors believe their value is likely to significantly grow over the long term; whereas value shares are held since they are regarded as being cheaper than the intrinsic worth of the companies in which they represent a stake. By mixing styles which can out or under perform under different economic conditions the overall risk rating of the investment portfolio is reduced.Picking the right mix of these depends on your risk profile – it is essential to chose an investment portfolio commensurate with your attitude to investment risk.Multi Manager Funds
In the UK alone, there are over 2,000 registered funds to choose from. The market is in a constant state of flux, with new funds being launched and funds merging or closing to new business. Furthermore, Fund Managers change funds and are notorious for moving around the Investment Houses either because they are head Hunted or because they are sacked. As such, keeping track on who is managing a fund can be problematic. Fund managers need to be selected and monitored to ensure they remain at the top of their game – and replaced when they do not.
Multi-manager funds offer investors access to a wide range of fund managers, together with dedicated experts to select and monitor them on behalf of the investor. They give access to multiple funds through a single fund; as a result multi manager funds can increase the potential for diversification and hence reduce the overall risk. Multi managers have expert knowledge of fund managers and they select the appropriate funds in each asset class and region with the aim of further reducing risk. The multi-manager will keep track of all fund changes and adjust the asset allocation of the fund accordingly.There are two distinct categories of multi-manager: "fund of funds" and "manager of managers". A fund of funds blends a choice of funds and may be either fettered- which means they only invest in funds from the same Fund Group. Unfettered funds have wider investment powers and can invest in funds provided by other groups. The fund of funds manager cannot specify investment decisions made by the underlying funds. A manager of managers will appoint the underlying fund managers who buy assets directly. A "segregated mandate", which is an instruction setting out the parameters in which the money is to be invested, is issued to each of the appointed managers. These mandates cover issues such as the amount of risk to be taken or on the general investment style. If a fund manger is not performing satisfactorily against their mandate, they can be replaced.
Risk Warnings
• The risk that the buying power of your capital decreases over time.
• The risk that you lose all your money.
• The risk that the growth you experience is variable.
• The risk that you might get back less than you invested.
• The risk that you do not achieve one of your objectives.
• The risk that you lose out on potentially better returns.
