Warning: The following is a list of some of the important risks factors that prospective investors should consider prior to making a decision to invest in Funds. The list is not intended to be comprehensive or exhaustive. Various other risks also apply, depending on the Fund acquired. You should ensure that you read and fully understand the relevant Prospectus, Supplement and Key Investor Information Document, including risks associated with any investment, prior to making a decision to invest. You should also consult Davy in the event that you require further information or have any queries in relation to same.
The Relationship between Risk and Return
Risk is an inherent part of investing. Generally, investors must take greater risks to achieve greater returns, however taking on additional risk does not always lead to greater returns. Investors who take on additional risk, must be comfortable with experiencing significant periods of underperformance in the expectation of achieving higher returns over the longer term. Those who do not bear risk very well have a relatively smaller chance of making high earnings than do those with a higher tolerance for risk; similarly they have a smaller chance of making significant losses. It's crucial to understand that there is an inevitable trade off between investment performance and risk. Higher returns are associated with higher risks of price fluctuations.
It is important to establish your attitude to risk before you begin investing. Is the security of your capital the overriding influence in your investment decisions or are you willing to tolerate the ups and downs of the market in the expectation of higher returns?
Although not always the case, generally speaking, the level of return on your investments will reflect the underlying risk. If you’re only willing to accept low or zero levels of uncertainty, your investment returns are also likely to be low. However, an investment that seems very attractive in terms of its potential return may not be the right choice if it carries an unacceptably high risk. High risk investments generally require that the investor has the ability to hold it for the longer term (5-10 years), in order to allow shorter term performance issues time to resolve themselves. Importantly, investors should remember however that accepting high levels of risk does not always result in high returns.
Not all investment decisions will turn out as expected, but diversification can be a key tool in managing risk. By acquiring a portfolio of varied investments across a range of asset classes (shares, bonds, cash, etc), geographies and sectors, investors can minimise the effects which poorly performing investments can have on their overall portfolio. This diversification theory applies within asset classes as much as at portfolio level.
There are specific risks which investors should be aware of when investing in certain asset classes. The following sections deal with some of the risks which apply when investing in Funds.
Some of the Main Risks of Investing in Funds
Investment Funds can generally effectively reduce the risk of being exposed to a single security, by investing in a portfolio of securities, thereby reducing the impact of a poor performance by any single security.
However, all investments involve varying degrees of risk. There is a risk that after you have invested in a Fund the value of its underlying investments may fall overall. If that occurs the Fund’s unit price will also fall to reflect the lower value of the underlying investments. If you were to sell (redeem) your investment in that Fund at that time you may incur a loss i.e. you may receive back less than you initially invested.
There are many factors, which may impact on the performance of a Fund. The risks that apply will largely be determined by the asset class you invest in, and the selection of investments the manager makes. These risks include, but are not limited to:
Funds may enter into contracts that entail a credit exposure to certain counterparties. To the extent that a counterparty defaults on its obligation and the Fund is delayed or prevented from exercising its rights with respect to the investments in its portfolio, it may experience a decline in the value of its position, a loss of income and possible additional costs associated with asserting its rights.
Where the Currency of a Fund varies from the Currency of the investor, or where the Currency of the Fund varies from the currencies of the markets in which the Fund invests, there is a Currency risk to the investor. A Fund may invest in securities denominated in a number of different currencies other than the Base Currency in which the Fund is denominated. Changes in foreign Currency exchange rates may adversely affect the value of a Fund’s investments and the income thereon.
Emerging Markets Risks and Political and Economic Risks
Where Funds invest in Funds with exposure to emerging markets or increased political or economic issues, the risk to the performance of the Fund could be greater.
Some Funds may borrow Funds or utilise derivatives to increase potential returns, techniques that can magnify both gains and losses. Investors should carefully consider the policies employed by each Fund.
Investing in a small number of assets or in only one asset class or only one market exposes an investor to the risk that these assets under perform. Investing in a broader range of investments can help to mitigate some of this risk.
Liquidity risk is the risk that positions cannot be realised at a particular point in time. Investment Funds incorporate two levels of liquidity risk. The first relates to the investment manager's ability to buy or sell positions for the Fund, the second relates to an individual investor's ability to buy or sell units in the Fund itself.
There is the risk that the Fund manager you invest with or the appointed investment manager may not perform according to your expectations.
Market risk is the risk of investing in a market which may decline in value. Where a Fund is exposed to a single country market, potential volatility is increased.
Where Funds are domiciled in other jurisdictions, the regulatory protections provided by the local regulatory authorities may not apply. Conversely, Funds may be subject to more restrictive regulatory regimes which may prevent the Fund from making the fullest possible use of investment limits.
Securities may perform differently. The individual securities selected for a Fund will ultimately determine its risk level and performance.
Suspension of Share Class Dealing
Investors are reminded that in certain circumstances their right to redeem from or switch Funds may be suspended.
Fees and Funds Investing in Other Investment Funds
A Fund incurs costs of its own, comprising the fees paid to the Management Company and other service providers. It should be noted that, in addition, where such a Fund invests in other Funds, it incurs similar costs as these Funds in turn pay similar fees to their manager and other service providers.
Furthermore, the investment strategies and techniques employed by certain Investment Funds may involve frequent changes in positions and a consequent portfolio turnover. This may result in brokerage commission expenses which exceed significantly those of other Investment Funds of comparable size. Investment Funds may be required to pay performance fees to their manager. Under these arrangements the managers will benefit from the appreciation, including unrealised appreciation of the investments of such Investment Funds, but they may not be similarly penalised for realised or unrealised losses. As a consequence, the direct and indirect costs borne by a Fund investing in Investment Funds are likely to represent a higher percentage of the Net Asset Value than would typically be the case for a Fund which invests directly in the relevant underlying investments (and not through other Investment Funds).
These are just some of the risks that are associated with an investment in Funds. Individual Funds will have their own individual risks. It is critical that investors understand the effect that these risks can have on their investments. Further information is available from Davy on request.