Investment Risks - The Henderson Smaller Companies Investment Trust

Winterflood Risk Rating:  Slightly Above 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

 Category  Volatility Relative to All Share
 Below Average <70
 Slightly Below Average 70-80
 Average 80-120
 Slightly Above Average 120-140
 Above Average 140-180
 High >180

(Source: Winterflood Secturities as at 30 January 2012).

In addition to the quantitative analysis, Winterflood's also assess a number of qualitative factors before determining and fund's risk rating. Issues  that may cause us to modify a fund's rating include:

  • Portfolio concentration by industry stock or 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

 

Trust Specific Risk Description
Smaller Companies Most of the investments in this portfolio are in smaller companies shares. They may be more difficult to buy and sell and their share price may fluctuate more than that of larger companies.
Single Country or Geographic Area If a fund is a specialist country-specific or geographic regional fund, the investment carries greater risk than a more internationally diversified portfolio.

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.