All investments involve risk. There is a chance with any investment of an uncertain outcome, and where the actual return may be different to what was expected.
Risk can cause the value of an investment to go up or down (i.e. be volatile). The extent of any volatility will depend on the specific investment and general market conditions. In extreme circumstances, risk can result in losses which can erode an investment’s entire value.
mySTART® allows you to invest in specific securities included in the list of Nominated Securities. Returns will therefore depend on the investment performance of those securities.
The principal investment risks that could affect your returns are:
- Market risk: changes in general market conditions may affect the value of investments, for example political events, natural disasters, legislative changes and economic events;
- Specific investment risk: an individual investment may face an unforeseen adverse event which affects the value of the underlying business and in turn, reduces the market price of the investment;
- Self-selected portfolio risk: you may select an individual security from the list of Nominated Securities that underperforms the market, or other investment options. Additionally, selecting one or a small number of securities will lead to a concentrated investment portfolio, which lacks adequate diversification;
- Currency and Hedging* risk: currency movements can have an adverse effect on the New Zealand dollar value of any foreign investments. As a general rule, any foreign fixed interest investment held within the QuayStreet Funds will be fully hedged to New Zealand dollars and any foreign share investments within the QuayStreet Funds may be fully, partially hedgend or unhedged within the Funds as the Manager deems this appropriate. The Investment Manager has the discretion to currency hedge all or part of any foreign share investments made in the QuayStreet Funds, if the Investment Manager deems this appropriate. When a foreign investment is left unhedged, the New Zealand value of that foreign investment will decline if the New Zealand dollar rises against the currency in which the foreign investment is held (*Currency and hedging is the act of reducing or negating the risks that arise out of changes in the movement of one currency against another, by using financial tools such as forward exchange contracts to mitigate potential losses)
- Interest rate risk: changes in market interest rates can have a negative impact, directly or indirectly, on the value of all types of share and fixed income investments (including property based investments);
- Counterparty risk: a third party may default on their obligations, resulting in a loss of value or an inability to complete transactions; and
- Manager risk: an investment manager or business manager may make poor decisions which have an adverse impact on investors. Where an Investment Manager uses the ‘manager of managers’ model, the risk is that it could make a poor decision in respect to the appointment or removal of an underlying investment manager. In addition, where performance is highly dependent on key personnel, the loss of the key personnel could materially affect the performance.
Other investment risks which may affect your returns including liquidity, borrowing, derivatives, relative return and benchmark risk.
Other Principal Risks
Investments involve other non-investment related risks, including:
- General business risk: disruption to the operations of mySTART® through such events as the loss of key personnel, failure of processes and procedures, the extended loss of power, other technology failure, or the destruction of premises;
- Regulatory risk: future changes to tax or general security legislation can affect the operation of mySTART® or your interests;
- Insolvency risk: an investment becoming insolvent or being otherwise unable to meet its financial obligations. If this occurs, you may not recover the full amount of your interest; and
- Taxation risk: changes to tax legislation could affect your interests.
ASSET CLASS RISK
Asset class risk involves the risks associated with two primary asset classes: defensive assets and growth assets.
Defensive assets, such as fixed interest securities, term deposits and cash, have different risk characteristics to growth assets, such as shares. The performance of defensive assets are usually more closely aligned to changes in interest rates than growth assets. A rise in interest rates will generally result in a decrease in the value of a defensive asset and the longer the period to maturity the greater the decline in the value of a defensive asset. Credit quality will also affect value, and if a company has a credit rating downgrade then the value of a defensive asset issued by it may fall. In extreme circumstances, if an issuer defaults on its obligations, a defensive asset issued by it may be worthless. Some of these risks may be mitigated by holding securities across different issuers, with different credit quality and maturities.
The value of a growth asset, such as shares and property, is reflected in the market price of the asset. Prices are generally driven by a company’s performance. If the company performs poorly, or if it needs to reduce or stop paying dividends, its share price will usually decline. There are also many broader market forces that can negatively affect the value of shares, such as a weak economy, increased regulation, political uncertainty or negative investor sentiment. Issues like these, as well as many others, can result in lower share prices.
Asset allocation risk
Asset allocation risk is the risk generated by the mix of income and growth assets within a Fund, or the sector and country investment decisions within markets. Research has shown that asset allocation is an important contributor to a Fund’s overall investment return. The Funds that have more defensive assets (fixed interest and cash) are likely over time to provide a lower return with smaller fluctuations in that return. The Funds that have more growth assets (shares and property) are likely over time to provide a higher return but with large variability in the returns from year to year. Sometimes returns can be negative. The asset allocation risk can impact both a Fund’s absolute return and its relative return compared to similar funds that have a different asset allocation.
How to Manage Investment Risks
We recommend using a variety of strategies to manage investment risks. We believe that prudent investing is founded on appropriate asset allocation and diversification. Asset allocation describes how a portfolio is split between the different types of assets (primarily cash, fixed interest, property and shares) and will largely determine the risk and return profile of your portfolio. Different asset types have different risk and return trade-offs and by changing the mix of these assets you can adopt different risk profiles. Lower risk profiles hold more cash and fixed interest investments, and less property and share investments. Conversely, higher risk profiles have a higher allocation to shares. We advise you to monitor the actual composition of your portfolio against allocations or targets, ensuring any differences are identified and rectified.
Diversification reduces risk by making sure a portfolio is not overly exposed to any one area, investment or issuer. We recommend diversified portfolios which invest in a wide range of securities, in a broad range of industry sectors, across a variety of markets.
Craigs Investment Partners produces commentaries on market movements and economic data, looking for economic changes and trends within global markets that could have an impact on a portfolio. We recommend you take into account any potential impact these may have on asset weightings within your portfolios. Craigs Investment Partners undertakes research and provides this to you via your Investment Adviser and our website to help you to consider your portfolio.
The Investment Manager uses equivalent strategies when managing investment risk in the QuayStreet Funds. The Investment Manager seeks to identify trends within markets that could have an impact on the composition of the QuayStreet Funds and adjusts the asset weightings and underlying holdings within the portfolio as it sees fit.