ESMA investment & pension fund risk rating.
An alternative way of fund risk rating is recommended by the European Securities and Markets Authority (ESMA).
Volatility is a measure of the variation of an investment’s returns over time. Funds with a higher volatility (i.e. a greater variation in their returns over time) are assigned a higher rating on the scale.
For example, a fund which is fully invested in cash or short-term bonds of a highly rated government would likely receive a “1” rating, whereas a fund entirely invested in highly leveraged private equity or property transactions would likely receive a “7”.
As market volatility increases Nelson Life feel that it is critical that your current risk profile and your current investment mix are appraised against your fund risk rating.
SOME EXTRA READING ON RELYING ON ESMA AND WARNINGS:
Historical data may not be a reliable indication for the future.
The Risk and Reward profile is not guaranteed and may change over time.
The lowest category does not mean “risk free” - i.e. counterparty risk.
The indicator above does not take account of the following risks of investing in the Fund:
Investing overseas can bring additional returns and spread risk to different markets. There are risks, however, that changes in currency rates may reduce the value of your investment.
General Investment and Market Risks of the Underlying Funds: The Fund’s activities may be significantly and adversely affected by general economic and market conditions, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws, and national and international political circumstances. These factors may affect the level and volatility of the Underlying Funds and the liquidity of the Fund’s investments. Unexpected volatility or illiquidity could impair the Fund’s returns or result in losses.
Currency Risk: There is a risk of loss arising from exchange rate fluctuations or exchange control regulations.
Use of derivatives for currency hedging purposes involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other investment
Key warnings
Volatility cannot measure or predict extreme events:
It can’t account for every eventuality in the market place, and extreme events can cause large ‘tail effects’ which fall outside normal ‘probabilities’
It assumes the returns of the underlying assets to be ‘normal’. As derivative structures don’t always display a normal distribution of returns, Standard Deviation may not be the best measure of risk within certain funds. (hedge funds, Property funds)
It does not give you any measure of ‘risk adjusted’ returns.
Volatility’ can change over time
Volatility as a measure of risk and doesn’t differentiate between positive and negative returns
The EMSA scales don’t tell you the exact historic volatility of funds, but they do place funds with similar volatility together.
PLEASE NOTE there is no completely accurate way of predicting investment returns. Past performance is no guide to future performance, past volatility is no guide to future volatility.
Furthermore, even the theory allows for 5 years out of every 100 where more extreme returns will be recorded and volatility can be notoriously difficult to predict over the short term.
The ratings and theory can, however, help you compare and contrast the possible outcome profiles of different funds with different volatility histories.
Want to know more? We are available to discuss your options, and we look forward to hearing from you.
Our job is to help you choose a product and structure that will help you meet your goals.
telephone | 091441188 and/or email | office@nelsonlife.ie
RETIREMENT & PENSIONS | INVESTMENTS | FINANCIAL PLANNING | LIFE INSURANCE
Nelson Life Limited trading as Nelson Life is regulated by the Central Bank of Ireland.
WARNING: Past performance is not a reliable guide to future performance. WARNING: The value of your investment may go down as well as up. WARNING: You may lose some or all of the money you invest. WARNING: These funds may be affected by changes in currency exchange rates. WARNING: If you invest into this product you will have access until you retire (Pension Products). WARNING: The above content does not constitute investment advice, as it does not take into account the investment objectives, knowledge and experience of financial situation of any particular person. Prospective investors are advised to make their own assessment of the information contained herein and to obtain professional advice suitable to their own individual circumstances. WARNING: The information contained in this document is based on our understanding of current tax legislation and the current Revenue Commissioners interpretation thereof and is subject to change including retrospectively without notice. This is intended as a general guide only and is not a substitute for professional tax, legal and investment advice.