RISK DISCLOSURE STATEMENT


Unlike taking out an insurance policy (e.g., house & contents insurance) which is designed, at the cost of the premium (and any applicable excess), to provide financial protection against risk (e.g., for house & contents insurance, to protect against fire damage), investing in a Financial Product involves exposure to risk.

In general, risk is the chance that the return from your investment will be significantly different from what you expected.

We detail below some of the more significant risks associated with investment in Financial Products. At all times, you should carefully assess your own investment experience, objectives, financial situations and needs before making any investment decision. Risk Tolerance is the level of risk that an investor believes they are willing to accept. Risk Tolerance is personal and may or may not be affected by the circumstances of the individual and/or the population at large, and will depend on your age, income and salary, financial responsibilities, other assets you may hold, and the timeframe you have. Your own personal experiences will be a substantial factor behind your attitude to risk. It is possible to have a mismatch between the desired return and your Risk Tolerance.

The risks associated with investing include the risk that:

  • you may not receive the return you expect (either in the amount received or within the timeframe); and
  • you may lose some or all of your capital.

The desire for higher returns usually requires greater exposure to risk. Conversely, limiting exposure to risk means there is a risk of not achieving the desired financial objectives in quantum and/or time frame.

Some risk is inherent in all forms of investment. Specific risk can be diversified. Securities are generally more volatile than other asset classes (and derivatives are generally even more volatile). Some different types of risk include:

  • Market Risk: the risk of an asset which relates to movements in the sharemarket in general. Market movements may result from a number of factors, including political, economic, taxation or legislative changes.
  • Exposure Risk: the risk associated with investments in a particular industry sector, country or company.
    • Sector risks are associated with specific factors such as commodity prices, consumer demand for products, technology impacts, economic and industry cycles. An example of sector risk is when the gold price affects the price of gold mining securities.
    • An example of country risk is when an unstable political environment affects companies producing goods/services in that country or the ability to export to that country.
    • Equity specific risk relates to factors that specifically affect a particular company, such as company management, profit history, products and commercial brands, competition and longevity of a business. Examples of equity specific risk can relate to strong management, drilling results not being as expected, etc., having an impact on the share price of that particular company.
  • Domestic / International Risk: Changes to tariff and trade policies may cause price movements in a security. Interest rate movements domestically compared to other economies may also have an impact on local share prices. International events thus may have an impact on domestic companies.
  • Maturity Risk: some securities, company options and derivatives, for example warrants and exchange traded options, have a limited life and may expire valueless.
  • Limitations of Research: research is basically the opinion of an analyst at a point in time. If a Financial Product (such as an equity security) is recommended as a "buy", it may still not be a suitable investment for you, and you should always consult with your adviser designated client representative before acting on any research report. "Buy", "sell" or "hold" recommendations based on an analysts' opinion can only be General Advice, and you should always consult with your adviser designated client representative as to the appropriateness to your own particular circumstances, needs and objectives.
  • Exchange or currency risk: the risk that the value of an investment may be diminished by movements in the exchange rate on a foreign currency.
  • Liquidity risk: if the investment is held in an illiquid market, this may result in greater price volatility.

Volatility Risk: an investment can be subject to a degree of uncertainty in relation to:

  • income (such as variation in interest earned or dividends received); and
  • price/value (variation in price or value equating to capital gain or loss).

Volatility is a term that refers to the unpredictable shifts of investment income and value over a period of time. Volatility can occur at any time; it can have either a positive or negative impact and generally it is the risk that has the broadest impact on an investment. The greater the volatility the more frequent the shift. Volatility Risk encompasses the effects of many of the abovementioned risks.

Specific Risk can be reduced by diversification, whilst Systemic Risk cannot. Market Risk is a Systemic Risk, whereas other risks may be either a combination of Systemic and/or Specific Risk.

Other forms of risk may include:

  • Inflation Risk: by not investing at all (eg. holding assets as cash) or not investing sufficiently in growth products, the value of the Account's assets may not keep pace with inflation which may result in a poor real return on the Account's assets;
  • Margin Lending Risk: under a margin loan, the loan is secured against the investment with the lender capping the value of the lodged security to the prevailing market price discounted to a maximum lending percentage. Interest expenses are subject to prevailing interest rates and any income is subject to Equity Specific (Company) Risk. As the loan is exposed to the price of the security, in a rising market there is positive leverage in respect of capital gain versus the equity employed. However, if the price of the security falls, the loan may be subject to a Margin Call, in which case, selling pressure may drive the price even lower which may have the effect of negative leverage; and
  • Market Access and Timing: the ASX market for example operates on a priority system in relation to both price and time. In addition to Liquidity Risk there is a risk that an order may not be able to be entered into the market or executed due to the market moving past the desired price, trading halts, or failure of the market for any reason.

One way of minimising risks, such as those outlined above, is to diversify the Account's investments across asset classes. The theory is that different asset classes do not all move in the same direction at the same time. Thus, while the impact of an adverse risk event could be severe on part of the portfolio, the whole portfolio would not suffer as much.