1
SummaryofInvestmentRisks
Broadly,theriskininvestingisthataninvestormayreceivelessormoreincomethantheyexpect,thatthe
capitalvalueoftheirinvestmentcanfallaswellasriseandthattheymaylosesomeoralloftheircapital.
RiskandReturn-Thehighertheinvestmentrisk,thehighertheexpectedreturnorconverselythehigher
theexpectedreturn,thehighertheinvestmentrisk.Inotherwords,inordertoachievehigherreturns
investorsmustbewillingtotakemoreriskoriftheywishtominimiserisk,theymustbewillingtoaccept
lowerreturns.
MismatchRisk–Aninvestmentmaynotbesuitablefortheinvestor’sneeds,objectivesandriskprofile.
Matchinginvestmentswithinvestor’stoleranceforriskandtimehorizonrequiresactivemonitoringasthese
aresubjecttochange.Longevityriskforexampleistheriskthataninvestorwilloutlivetheirinvestments.
MarketRisk–Economiccycles,technological,politicalorlegalconditionsandevenmarketsentimentcause
investmentmarketsandinvestmentreturnstoriseandfall.Anticipatingmarkettimingisverydifficultasno
twoeconomiccyclesarealike.
LackofDiversificationRisk–Investinginasmallnumberofassetsorinonlyassetclassexposesinvestorsto
higherrisk.Diversificationacrossmarkets,assetclasses,marketsegments,managersandstylesreduces
overallrisk.
GearingRisk–Gearingortheuseofborrowedmoneycanincreasetheexposuretotheunderlying
investmentsandassuchcanmagnifylossesaswellasgains.
BusinessRisk–Anyindividualassetorgroupsofassetscanfallinvalueorfailtodeliverexpectedincome
forarangeofoperational,managementorbusinessenvironmentreasons.Forpropertiesthisincludesthe
riskoflosingtenants.
InterestRateRisk–Changesininterestratescanhaveanegative(aswellasapositive)impacton
investmentvaluesandincomereturns.
InflationRisk-Theriskthatreturnsandcapitalvaluemaynotkeeppacewithinflationandthatthe
purchasingpowerofcapitaliserodedovertime.
CreditRisk-Theriskthattheinstitutionyouhaveinvestedwithmaynotbeabletomaketherequired
interestpaymentsorrepayyourfunds.
DurationRisk–Theriskthatre-investmenttermswillhavedeterioratedbythetimethecashfromcurrent
investmentsbecomesavailable.
GrowthandDefensiveAssets
Investmentassetscanbedividedintotwobroadclasses:
Defensiveassets–theseincludecashandfixedinterest(orbonds)andwillgenerallyprovidepredictable,
stableandconsistentreturnsovershorterperiods.Cashistheleastriskyinvestmentasitscapitalvaluewill
notchange,whilefixedinterest(orbonds)canlosevaluewheninterestratesriseorascreditriskis
repriced.
Growthassets–theseincludelistedshares,privateequity,propertyandalternativeinvestmentsandcan
deliverhigherreturnsoverthelongterm,butboththeirvalueandtheirincomereturnscanfluctuateinthe
shorttermandreturnsarenotreadilypredictable.
Notethathybridssuchasconvertiblenotes,preferencesharesandevencommoditieshavecharacteristics
ofbothgrowthanddefensiveassets.
RiskandReturn
Thediagrambelowdepictstheindicativetypicalrelationshipbetweenriskandreturnofthesemajorasset
classes:
Return
Hybrids
Aust
Property
Aust
Int’l
Shares
Property
Private Equity
Int’l Shares
Int’l Fl
Aust Fl
Cash
Risk
Low
Medium
High
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CurrencyRisk–Investmentsdenominatedinoverseascurrenciescanriseandfallwhenthevalueofthe
overseascurrencychangesinrelationtotheAustraliandollar.
LiquidityRisk–Theriskthataninvestormaynotbeabletoconverttheinvestmentreadilytocashwhen
theyneedtoeitherduetoanabsenceofbuyersfortheinvestmentoranabsenceofamarketinwhichto
selltheinvestment.
CounterpartyRisk-Investinginvolvescontractsandcounterpartyriskistheriskthattheotherpartytothe
contractcannotmeettheirobligationsunderthecontract.
HedgeFundRisk–Hedgefundshavepotentialtodeliverpositivereturnsunderallmarketconditions,
includingfallingmarkets.Theytypicallyhavelowcorrelationtotraditionalassetclassesandmayinvolve
specialisedstrategiessuchasshortselling,programtrading,swaps,arbitrage,andderivativestrading.The
riskswithhedgefundsarethattheymaychargehigherfees;maybepoorlyregulated;areoftenhighly
leveraged;canbehighlyilliquid;offerlowinvestmenttransparencyandrelyheavilyontheskilland
judgementofthemanager.
AssetClassRisks
PrivateEquity
Alternatives
ListedInternational
Shares
ListedAustralian
Shares
ListedInternational
Property
ListedAustralian
Property
ListedAustralian
Hybrids
InternationalFixed
Interest
AustralianFixed
Interest
Thetablebelowprovidesanindicationofthetypesofinvestmentrisksbornebyeachassetmajorclass:
Business
•
•
•
•
•
•
•
InterestRate
•
•
•
•
•
•
•
•
Inflation
•
•
Credit
•
•
•
•
Duration
•
•
•
•
Currency
•
•
•
•
Liquidity
•
•
•
•
Counterparty
•
•
•
•
•
•
•
•
•
HedgeFunds
•
•
•
•
•
•
•
•
•
•
Risks
Cash
3
NOTE:Aninvestmentwithinanassetclassmaynotbeexposedtoeachoftherisksassociatedwiththat
assetclass.
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