Investment Risks
Winterflood Risk Rating: Average
The basis of Winterflood’s risk model is the concept that the FTSE All Share represents average risk for a UK based investor. They then classify funds in one of six categories depending on their risk characteristics relative to the All Share index. The key quantitative measure that they use to assess risk is volatility of returns, using historic NAV performance over 1 and 3 years. The starting point for classifying funds is a comparison of volatility against the All Share using a series of bands, illustrated in the table below:
Risk Classifications – Initial Quantitative Screen
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Category
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Volatility Relative to All Share
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Below Average
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<70
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Slightly Below Average
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70-80
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Average
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80-120
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Slightly Above Average
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120-140
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Above Average
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140-180
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High
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>180
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(Source: Winterflood Securities)
In addition to the quantitative analysis, Winterfloods also assess a number of qualitative factors before determining a fund’s risk rating. Issues that may cause us to modify a fund’s rating include:
• Portfolio concentration by stock or industry sector
• Changes in mandate, investment style, gearing policy or capital structure
Type of asset class e.g. volatility tends to be understated in smaller companies due to illiquidity of the underlying investments, while private equity funds only publish NAV on a periodic basis.
Trust Specific Risks
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Trust Specific Risk
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Description
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Exchange Rates
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Not all the investments in this portfolio are made in Sterling, so exchange rates could affect the value of and income from your investment.
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Single Country or Geographic Area
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If a fund is a specialist country-specific or geographic regional fund, the investment carries greater risk than a more internationally diversified portfolio.
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General Risks
Value of Investments
The value of investments and the income from them may go down as well as up and you may not get back your original investment.
Past Performance
Past performance is not a guide to future performance.
Inflation
Inflation may affect the future buying power of your money.
Counterparty Risk
The investment trust will be subject to the risk of a counterparty being able to perform its obligations with respect to transactions, whether due to insolvency, bankruptcy or other causes. The investment manager assesses the credit worthiness of the counterparties as a part of the risk management process.
Borrowing
Investment trusts can borrow money to make additional investments on top of the money invested by shareholders. If the value of these investments falls, borrowing will magnify the negative impact on share performance.
Tax Treatment
Tax assumptions and reliefs depend on an investor's circumstances and may change if those circumstances or the law change.
Discount
The discount or premium at which a Trust shares trade may expand or contract as a result of relative performance and market sentiment.
Accounting, Legal and Regulatory
A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss of investment trust status resulting in capital gains realised within the portfolio being subject to corporation tax. A breach of the UKLA Listing Rules could result in suspension of a trust's shares, while a breach of the Companies Act 2006 could lead to criminal proceedings or financial or reputational damage.
Operational
Disruption to, or failure of, the managers accounting, dealing or payment systems or the custodians records could prevent accurate reporting and monitoring of the trust's financial position. Suppliers may not provide the required level of service.
Derivatives
Derivatives may be used for the purposes of efficient portfolio management. It is not expected that use of derivatives will lead to a higher risk profile. Certain Trusts may use derivatives for investment purposes.