The Iveagh Guide to Risk
As an investor, I am very happy with the way our investment managers have guided my portfolio and I’m genuinely confident they are the right people to make the best investment decisions. During the most challenging times Chris and his team successfully looked after my capital, shielding it from falling markets during a period when so many investors lost so much. It is my intention that others have the opportunity to benefit from the same talent and fortitude.
welcome Since Arthur Guinness’ first success more than 250 years ago, subsequent generations of my family have invested for their own long-term futures, always mindful of the potential risks that may lie ahead. With that tradition and insight in mind, we are very excited to open our doors so that all investors can share the investment experience, know-how and innovation that Iveagh has to offer. Investment is about the trust between people. We have a team of talented investment professionals who are genuinely passionate about helping investors to grow and protect their wealth over time so that we can leave a lasting legacy. Our trusted partner, eValue FE, also shares the same values, awareness and day-to-day concerns about risk, and together we have created a powerful and investor-friendly suite of investment planning services. Like the next generation, we are looking forward. We are proudly confident that we have the best people, expertise and specialist partners in place to provide the next generation of skills, ideas and technology to meet the needs of our future generations of investors. Lord Iveagh, Edward Guinness
Marke t le ader s on risk Established in 1993 and the first specialist team to explain risk to consumers More than 80% of the UK fund provider market use eValue FE risk profiling solutions More than 50% of UK financial adviser firms use eValue FE adviser planning tools More 250,000 UK consumers have access to eValue FE investment planning tools eValue FE are the UK’s leading experts, focussed entirely on risk suitability and planning tools The risk profiler and the investment/retirement planners meet all the regulatory obligations and give an audit trail for compliance Advisa Centa provides a repeatable process to prove risk suitability eValue FE provides the only forward-looking fund risk rating service
Fore ward
Bruce Moss Founder and Strategy Director eValue FE The often quoted words of Benjamin Franklin “In this world nothing can be said to be certain, except death and taxes” have, since the credit crunch, never been more obviously true for investments. There is, and has never been, such a thing as a risk free asset or return. Even without the impact of events (predictable or otherwise), the relative riskiness of different types of investments depends on the investment term. This variability is not consistent from one asset class to another. Some investments will become relatively less risky as the investment term increases and other will increase in risk. For example, cash deposits, which are considered risk free for short investment terms, become increasingly risky the longer they are held and therefore cease to be “risk free”. Investors tend to have goals such as retirement saving, mortgage repayment or funding education fees. For each of these, investors may see the risk they face differently. For example, the retirement investor may be concerned about inflation, so an index linked bond may be the “risk free” asset. However they may not necessarily be the most appropriate asset due to the low returns offered by indexed linked bonds. Investors seeking long term growth in addition to some inflation protection may decide that the extra return offered by equity investment more than compensates for the extra risk. A better understanding of the risk reward trade-offs an investor is prepared to make will help to ensure informed and confident decision making. This is something that Iveagh and eValue FE have worked together to support. April 2013
ABOUT RISK All investment involves risk to some degree because it is the risk that commands the interest, premium or return that we receive for placing our money in a particular investment. The more risk we take with our money (our capital) the better the potential returns we should expect. However, there is a trade off between risk and reward as there is also a greater chance of losing some or all of the capital.
gwendolen Guinness 1881-1966
THE INVESTOR’S VIEW OF RISK As investors, we all need to have a clear view on the amount of risk we feel comfortable taking. This depends on our individual circumstances. For example, how much capital we have to invest, whether we want to keep that capital as safe as possible and in doing so accept that we are likely to receive a lesser return on our investment, or whether we are willing to take greater risks with some or all of our capital to achieve potentially higher returns. The term of the investment is also important. If we’re investing over a short term period then it may be wise not to take too much risk with our capital in case we need to access the capital quickly. If we’re investing over the long term it may be appropriate to take more risk, or a range of risk, as there will be more time to recover any losses that may occur.
ARTHUR GUINNESS 1725-1803
MITIGATING RISK Most investors seek out five main types of investment assets, from the lowest risk to higher risk as follows: cash, government bonds, corporate bonds, property, and equities (stockmarket investing). Traditionally, depending on an investor’s personal risk profile, investment portfolios have been constructed using a combination of asset types, the most common being a mix of equities, bonds and cash. This combination keeps some capital in less risky cash, complemented by government and/or corporate bonds, with equities adding the potential for an element of higher returns. Even cash has an element of risk longer term as inflation can erode its value over time. The correlation or alignment between these types of investments was historically seen as low, so if equity markets fell for example, this would be offset to some extent by steadier returns from bonds. While largely this still holds true, the recent financial crisis severely affected all asset types, showing that the correlation (the risk versus return relationship between assets) was a lot closer than many had believed. This is still the case today. Nevertheless, spreading or diversifying our investments remains the best way to mitigate risk in our individual portfolios, whether we prefer a cautious approach to investing or we can take higher risk for higher returns.
EDWARD CECIL GUINNESS 1847-1927
PORTFOLIO DRIF T During the life of your investment portfolio, some investments may perform better than others. Having a properly diversified portfolio ensures you have the right balance of investments to match your personal risk profile over a defined period of time. As the risks associated with assets change over time, so do our individual circumstances. What might be a suitable asset at the age of 25 may not be appropriate later in life because our lifestyle and responsibilities change, along with our risk profile. To keep our investment portfolios appropriately diversified, they will need to be “rebalanced” from time to time. For example, if a portfolio has 10% invested in cash, 40% in bonds and 50% in equities and the stockmarkets have a “bull run” (fast increase in returns), the equity portion of the portfolio may make a lot of money while the cash and bonds rise only slightly. This will mean that the percentage of the portfolio invested in equities will rise disproportionately, changing the balance of the portfolio. If the stockmarkets were then to fall, there would be a greater impact on the overall portfolio. Cashing in some of the equities and redistributing the returns into bonds and cash can rebalance the portfolio and ensure it is once again adequately diversified to better reflect the long term investment goals.
RUPERT EDWARD CECIL LEE GUINNESS 1874-1967
POOLED INVESTMENTS Pooling our money with other investors into managed funds is another means to help spread risk. Mutual funds - including unit trusts and open-ended investment companies (OEICs) - are the most common investment types to do this. Mutual funds are run by full-time fund managers whose job it is to monitor the economic environment and stockmarkets and make investment decisions for investors: choose the right spread of asset types, as well as the right investments within those asset types from the many thousands available. By investing collectively in a pooled fund, there is more money to invest and this can be spread across a far greater range of investments than most individual investors could achieve on their own, further helping to diversify the risk in our investments.
KENELM LEE GUINNESS 1887-1937
RISK- R ATED AND TARGET-VOL ATILIT Y FUNDS Since the financial crisis there has been greater emphasis on, and investigation of, risk within investor portfolios. Numerous fund ranges have been introduced rating the risk of the funds – perhaps as cautious, or balanced or aggressive - based on a mix of two to three asset types. However, risk-rated funds are based on the past performance of the fund, as wells as other historical data, rather than what the fund is trying to achieve for investors. While risk-rating a fund provides some information about how the fund has performed in certain conditions, it is very much a “rear-view”. In our view, this is not enough for investors. Iveagh believes a target-volatility approach for a fund provides investors with a better understanding of how a fund’s diversified portfolio is performing and behaving in relation to an investor’s personal risk profile – maintaining the best possible match. Target-volatility is a forward-looking investment strategy that analyses all the different types of assets to identify where best to invest and what risks may be involved. Diversification is key to managing risk - the freedom to invest globally, across multiple assets, using a broad range of investment vehicles. We actively analyse 20 different asset types (including cash, bonds and equities) to enable us to allocate investors’ money appropriately and minimise the potential risks. As goal-driven investments, target-volatility funds can be more closely aligned with an individual investor’s financial and life planning goals.
RORY GUINNESS 1975-
THE IVE AGH CORE PORTFOLIOS The Iveagh Core Portfolios are investment funds which hold portfolios of globally diversified assets, derived from real-time analysis of 20 different asset types (more than the typical cash, bonds, equities). Each fund has its own volatility target defined over a period of time (risk profile) in much the same way that an investor’s personal risk profile works. The Iveagh Core Portfolios are built on the same foundations as the investment philosophy which has served the Guinness family for six generations. The funds invest in a diversified range of asset types across global markets and regions according to changing financial and economic conditions. This approach aims to position the funds appropriately to preserve capital when the markets are falling, which in turn will help capture growth when markets recover. Uniquely, Iveagh’s team of investment professionals will take action to reduce the target volatility for each Core Portfolio if economic or market risk increases. The team’s investment process includes a top down view of the global economy, as well as analysis of individual markets, and is designed to give clear signals of when decisive action needs to be taken. This is combined with the real-time analysis of 20 different asset types. Like the Guinness family, our fund investors are not just seeking investment returns, they want an investment strategy that honestly looks to protect and preserve their capital as well.
IMPORTANT INFORMATION As always client’s should remember that investment means that your capital is at risk and the value of investments can fall, therefore you may get back less than you invested, and that past performance is no guide to future performance. Please invest responsibly.
the Iveagh core portfolios. Something for all the family.
KENELM LEE GUINNESS 1887-1937 Racing driver, entrepreneur. The Adventurous Portfolio.
EDWARD CECIL GUINNESS 1847-1927 Businessman and philanthropist. The Balanced Portfolio.
gwendolen Guinness 1881-1966 One of the first female MPs The Cautious Portfolio.
ARTHUR GUINNESS 1725-1803 Founder of family firm. The Moderate Portfolio.
RORY GUINNESS 1975Author, businessman, father. The Income Portfolio.
RUPERT EDWARD CECIL LEE GUINNESS 1874-1967 Academic, agriculturalist. The Growth Portfolio.
GLOSSARY OF RISK TERMS There are various types of risk to consider depending on the investments used. Here are descriptions for some of terms you may find. Credit risk For example, the possibility that a bank holding savings might fail Inflation risk The impact of inflation on the returns we receive – a very real risk for cash savings at present Business risk For example, that the company issuing a bond may go bankrupt Liquidity risk Being able to sell investments quickly if needed Market risk The potential for stockmarkets to fall Social/political risk Including change of governments and policies, social unrest or war Currency/exchange rate risk The effect of reversing out of a currency when invested overseas Volatility The amount which an asset may fluctuate upwards and downwards
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