Clients and Advisors

• Our Services
• Advisory Service
• Discretionary Service
• Custody Arrangements
• ISAs
• SIPPs
• IHT Services
• Our People
• Contact Us
• Frequently Asked Questions
• Investment Approach
• Portfolio Construction
• Investment Process
• Asset Classes
• Equities
• Bonds
• Alternative Assets
• Private Equity
• Hedge Funds
• Structured Products
• Real Estate
• Cash
• Privacy
• Risk and Suitability
• Tax Rates
• Useful Links
• Disclosures
• Publications

Risk & Suitability

Our obligation is to take reasonable steps to assess whether the investments we recommend to our clients are suitable for them. This assessment will be based on their investment and risk objectives, financial circumstances and knowledge and experience in the relevant investment field. We are entitled to assume that our clients are able, financially, to bear any related investment risks consistent with their investment objectives. If any client feels this is not the case then they must make us aware of this and inform us of the changes to their financial position and/or provide us with the relevant information as to the level of their knowledge and experience, as appropriate.

Risk is an easy concept to grasp but much harder to define. It may mean different things to different people at different times. We thought that it might be helpful to clients to reflect on the definitions that we currently use to ensure that they remain appropriate to their own circumstances and preferences. If you are not sure to which risk category you are currently allocated or if you consider that your present risk category is no longer appropriate, please call us for further information or discussion.

Our current definitions of risk are as follows:

Low Risk

"The main objective is the preservation of wealth. Prospects for capital growth once inflation is taken into account will be limited by the need to place a portion of the available funds into secure assets such as conventional and index-linked gilts (government bonds) and investment grade corporate bonds. Convertibles may also be considered. A proportion may be invested in equities with a bias towards larger and more liquid "blue chip" shares included to give the potential for long-term growth. It is likely that such a portfolio would feature a meaningful proportion of investment in investment and unit trusts with some exposure to overseas markets through these. Where direct equity investments are appropriate and are made we seek to establish a "balanced" portfolio covering what are identified as the key longer-term growth areas."

Medium Risk

"A medium risk stance offers substantially greater opportunities for longer term growth than a low risk portfolio but correspondingly there is likely to be a greater degree of volatility in the performance of the investments. The bulk of the portfolio is likely to be in equity investments which have historically produced better returns over the long term than fixed interest stocks. Some higher risk investments may be included in order to maximise the chances of achieving a superior rate of return. Investments which might seem high risk when considered in isolation may well be acceptable when considering the portfolio as a whole. Where direct equity investments are made we seek to establish a 'balanced' portfolio covering what are identified as the key longer-term growth areas. Overseas and Specialist areas are likely to be covered using investment and unit trusts rather than direct equity holdings."

Higher Risk

"A higher risk portfolio is suitable for investors seeking to maximise longer-term returns and who are prepared to accept greater volatility in performance over and above the volatility of the markets overall. A higher risk portfolio may be accompanied by more active management in order to capitalise on short-term opportunities when these arise. Bond investment is unlikely to be a significant feature. Whilst the portfolio should be broadly balanced across the leading growth sectors, sector and stock preferences are likely to be backed more forcefully. In addition there may well be greater emphasis on second tier shares (by definition less marketable)."

It may be helpful to explore some of the concepts contained in these definitions more fully.

• Bonds are fixed obligations of the issuer to repay a fixed amount of capital at a pre-determined time and to pay interest at a fixed rate at pre-determined intervals. Because all the capital and income payments of bonds are pre-determined the only risk is that the issuer may default on its obligations. In the case of the British Government the risk of default is considered to be practically non-existent. In the case of investment grade corporate bonds the risk of default is considered to be very low. Bond prices tend to be less volatile than equity prices but can be affected by changes in interest rates. Any such volatility is of little concern to those who intend to hold bonds until they are repaid.
  
  
• Investment grade (in relation to bonds) means bonds that have been given a credit rating of "BBB" or higher by the Standard & Poors credit rating agency (or an equivalent grade by other recognised independent rating agencies). This means that the bonds have been assessed to have a relatively low risk of default on either income or capital payments. It is important to recognise, however, that such ratings are subjective, that credit analysts can be fallible and that credit agencies can and do amend their ratings of bonds over time (in response to changes in the perceived creditworthiness of the issuing entity).

• Convertibles are similar to bonds but confer on the holder a right to convert their holding into ordinary shares of the issuer on pre-determined dates at pre-determined prices. Convertibles may behave more like equities than bonds especially if the conversion terms are favourable. There are now very few convertibles in issue.
  
  
• Blue Chip. There is no textbook definition of the term blue chip but it refers to equities that are considered to be of high quality as regard to their finances, management and their business models. The majority (but not all) of the constituents of the FTSE100 Index would be considered to be blue chips.
  
  
• Long-term. There is, again, no recognised definition of this term but we consider that long-term investment should be undertaken with the intention that the holding period should be not less than five years.
  

• By "longer-term growth areas" we mean sectors or industries that have the capacity to sustain growth at a more rapid rate than the economy as a whole over a period of not less than five years.
  
  
• "Volatility" is a statistical measure of the variability of historic returns. It is often equated with risk although, in our view, volatility is an inadequate measure of all types of investment risk. It does, nevertheless, have the advantage of being measurable. Why does volatility matter? Because it represents uncertainty. For example someone approaching retirement age and saving into a SIPP would not want the value of the SIPP portfolio to fall sharply immediately before needing to buy an annuity to provide his/her pension. For investors without such known and inflexible deadlines, however, volatility should hold fewer fears.
  
  
• By "higher risk investments" we mean instruments that may display above average volatility. Examples include highly geared investment companies, smaller capitalisation equities and equities offering little or no dividend income but with significant growth potential. Such instruments may offer strong relative performance in periods of rising equity prices but may fall more sharply than average in a bear market. When blended with lower risk instruments such as bonds, higher risk investments can be suitable constituents of a medium risk portfolio.
  
  
• By "specialist areas" we mean ones that are not easily or efficiently accessible by most individual investors. Examples include commercial real estate, private equity, hedge funds and some sectors such as technology where it is desirable to have exposure to a basket of stocks rather than trying to pick one or two winners. For the majority of clients using an investment trust or unit trust to access overseas equity markets and these specialist areas makes sense since it spreads risk and reduces the cost of direct holdings.
  
  
• "Active management" means that the opportunity may be taken to take profits on a successful investment (or take losses on an unsuccessful one) where a more attractive investment opportunity is identified. Active management will necessitate higher transaction costs (commission, stamp duty and dealing spread) but should enhance portfolio returns sufficiently to at least justify this additional expense.
  
  
• By "second tier" shares we mean companies that have relatively small market capitalisations. Such shares are likely to be constituents of the FTSE Small Cap index rather than the FTSE 100 or 250 indexes. In certain cases it may also be appropriate to include investment in companies quoted on AIM (Alternative Investment Market) or Plus exchanges. Second tier shares are likely to be less frequently traded or to be traded in relatively small lot sizes. This means that it may be difficult to buy or to sell holdings quickly especially when equity prices are moving rapidly. Second tier shares, therefore, carry greater risk than blue chips but also may have greater potential to achieve long-term growth. In the case of AIM or Plus quoted shares there may also be attractive Inheritance Tax benefits to be considered.

The foregoing is only a very brief introduction to the subject of risk. It is important to understand that the link between risk and return, while it undoubtedly exists, is not a hard and fast one. The acceptance of risk is a necessary but not a sufficient condition for the achievement of higher returns.

While the historic performance of securities can be used to produce statistical proxies for risk, such backwards-looking measures may not provide an adequate or accurate guide to future risk.  The Northern Rock debacle highlights that most market participants did not forecast that its business model coupled with the downturn in world credit markets would expose it to the serious funding issues that caused such damage. Prior to the emergence of the credit crisis in the third quarter of 2007, the historic share price volatility of Northern Rock had been low and quite stable and only shot up when it became apparent that the company faced a serious liquidity issue.

Northern Rock may be a rather extreme example but it shows that we shouldn't rely on historic prices in order to gauge the risk of any investment.

Understanding your risk approach will not prevent us from sometimes making poor recommendations but it will prevent us from making ones that we know to be unsuitable. We will advise our clients on the basis of our best judgement at the time but we cannot be held responsible if any investment fails to achieve its expectations. It should, of course, be remembered that all investment carries some degree of risk and that you may not get back the original capital invested. The value of the investments may fall as well as rise and past performance is not necessarily a guide to future performance.