Our Risk Categories

Here we consider different types of funds, their sectors, and their risks as well as rewards.

But what is "risk"?

In short, “risk” for our purposes means volatility. Volatility is simply how much the value of your investments go up and down from day to day – it is about your investment journey.

We identify three broad categories of risk:

1. Low

2. Medium

3. High

The way we categorise the fund sectors within these broad categories tends to reflect how the industry as a whole does the same, albeit they tend to break these down into more sub-categories. We use these 3 categories for clarity, and because making it much more complicated can lose investor’s attention.

Unit Trusts vs Investment Trusts

In the below text, you will see two prefixes:

(UT) – This stands for Unit Trusts, also known as funds, and includes OEICs.

(IT) – This stands for Investment Trusts.

Now let’s looks at the three risk categories and which types of funds sit within each.

1. Low Risk Fund Sectors

This category includes the following sectors:

UT Sectors

(UT) EUR Corporate Bond

(UT) EUR High Yield Bond

(UT) EUR Mixed Bond

(UT) Global Corporate Bond

(UT) Global EM Bonds - Blended

(UT) Global EM Bonds - Hard Currency

(UT) Global EM Bonds - Local Currency

(UT) Global Government Bond

(UT) Global High Yield Bond

(UT) Global Inflation Linked Bond

(UT) Global Mixed Bond

(UT) Mixed Investment 0-35% Shares

(UT) Short Term Money Market

(UT) Specialist Bond

(UT) Sterling Corporate Bond

(UT) Sterling High Yield

(UT) Sterling Strategic Bond

(UT) Targeted Absolute Return

(UT) UK Direct Property

(UT) UK Gilts

(UT) UK Index Linked Gilts

(UT) USD Corporate Bond

(UT) USD High Yield Bond

(UT) USD Mixed Bond

1.1    Risk and Reward Example - (UT) Sterling Corporate Bond

You are prepared to accept some capital volatility for the potential of a better return than on deposit, but do not want the day-to-day risk of a stock market investment.

The reward: Over the last 10 years, the average total return was 91% for the top 20% of Corporate Bond funds (net income re-invested). On deposit this was around 3%. Over longer periods our expectation is simply for a margin over deposit returns.

The risk: Looking at the Corporate Bond sector as a whole, based on the last three years, in most months you should not see a fall in the capital value exceeding 1.5%. This is the “monthly risk” figure*.

Until 2008, the worst prior period was 1994/95. A typical lower yielding bond fund would have lost about 9% in 1994/95, and if you had been drawing income the fall in the capital value would have been more like 15%. In 2008 there were similar falls, though some funds lost in excess of 20%.

As a guide, the higher the yield on a bond fund, the greater the volatility and potential downside. 

1.2    Broader Look at Risk

The table below shows the “monthly risk” figure* for other key, low risk UT sectors.

Sector Monthly Risk %
(UT) EUR High Yield Bond 2.86
(UT) Global EM Bonds - Blended 2.84
(UT) Global High Yield Bond 1.92
(UT) Mixed Investment 0-35% Shares 1.20
(UT) Sterling High Yield 0.90
(UT) Targeted Absolute Return 0.95
(UT) UK Direct Property 0.39

2.    Medium Risk Fund Sectors

This category includes the following sectors:

UT Sectors

(UT) Asia Pacific Excluding Japan

(UT) Asia Pacific Including Japan

(UT) Europe Excluding UK

(UT) Europe Including UK

(UT) European Smaller Companies

(UT) Flexible Investment

(UT) Global Equity Income

(UT) Japan

(UT) Japanese Smaller Companies

(UT) Mixed Investment 20-60% Shares

(UT) Mixed Investment 40-85% Shares

(UT) North America

(UT) North American Smaller Companies

(UT) Property Other

(UT) UK All Companies

(UT) UK Equity Income

(UT) UK Smaller Companies

(UT) Volatility Managed

IT Sectors

(IT) Asia Pacific

(IT) Asia Pacific Equity Income

(IT) Debt - Loans & Bonds

(IT) Europe

(IT) European Smaller Companies

(IT) Flexible Investment

(IT) Global Equity Income

(IT) Japan

(IT) Japanese Smaller Companies

(IT) North America

(IT) North American Smaller Companies

(IT) Property Securities

(IT) UK All Companies

(IT) UK Equity & Bond Income

(IT) UK Equity Income

(IT) UK Smaller Companies

2.1    Risk and Reward Example - (UT) UK All Companies

This is for those comfortable with stock market risk, meaning that you’ve probably lived through periods of extreme volatility before, and are comfortable taking a long view (at least 5 years).

The reward: Over the last 10 years, the average total return was 237% for the top 20% of UK All Companies funds (net income re-invested). In contrast, the deposit return was just 3%, and the stock market index went up just 92% (again dividends re-invested).

The risk: Looking at the UK All Companies sector as a whole, based on the last three years, in most months you should not see a fall in the capital value exceeding 6%. This is the “monthly risk” figure*.

A typical UK stock market fund would have lost around 30% in February/March 2020, when the COVID-19 pandemic struck. Prior to that the steepest loss for a typical UK stock market fund was in 2008, with falls moving towards 50%, similarly in 2000/2003.

2.2    Broader Look at Risk

The table below shows the “monthly risk” figure* for other key, medium risk UT sectors.

Sector Monthly Risk %
(UT) Asia Pacific Excluding Japan 6.82
(UT) Japan 6.74
(UT) Japanese Smaller Companies 8.27
(UT) Mixed Investment 20-60% Shares 1.95
(UT) Mixed Investment 40-85% Shares 2.76
(UT) North America 5.40
(UT) North American Smaller Companies 6.55
(UT) UK All Companies 5.80
(UT) UK Smaller Companies 3.93

3. High Risk Fund Sectors 

This category includes the following sectors:

UT Sectors

(UT) China/Greater China

(UT) Commodity/Natural Resources

(UT) Financials and Financial Innovation

(UT) Global

(UT) Global Emerging Markets

(UT) Healthcare

(UT) India/Indian Subcontinent

(UT) Infrastructure

(UT) Latin America

(UT) Specialist

(UT) Technology & Telecommunications

IT Sectors

(IT) Asia Pacific Smaller Companies

(IT) Biotechnology & Healthcare

(IT) China/Greater China

(IT) Commodities & Natural Resources

(IT) Country Specialist

(IT) Financials

(IT) Global

(IT) Global Emerging Markets

(IT) Global Smaller Companies

(IT) Growth Capital

(IT) India

(IT) Infrastructure

(IT) Infrastructure Securities

(IT) Latin America

(IT) Private Equity

(IT) Renewable Energy Infrastructure

(IT) Technology & Media

3.1    Risk and Reward Example - (UT) Technology & Telecommunications

As well as being attracted to some years of 100% growth (such as with tech in 1999), you must also accept years of 50% losses, sometimes more, and take a 10-year view at least.

Our experience is that high risk funds often do not provide the consistent year to year performance of something like a good mainstream UK stock market fund. Not only will you see the value 100% up and 50% down over relatively short periods, but for long periods (years) you may experience lacklustre performance.

The reward: Occasional years of 100-200% returns. For the last 10 years, the average total return was 691% for the top 20% of Tech funds (net income re-invested).

The risk: 50-80% down, as in 2000/2003.

3.2    Broader Look at Risk

The table below shows the “monthly risk” figure* for other key, high risk UT sectors.

Sector Monthly Risk %
(UT) China/Greater China 7.82
(UT) Commodity/Natural Resources 7.06
(UT) Global Emerging Markets 6.37
(UT) India/Indian Subcontinent 7.05
(UT) Latin America 8.16
(UT) Technology & Telecommunications 5.61

*The “monthly risk” figure refers to the Historic Value at Risk (VaR). This tells you how much a fund might fall in 19 months out of 20. It is the 20th month which is the worry! For example, in one day in October 1987 the US stock market fell by more than 20%. In one month in Feb/March 2020 most stock markets fell around 30%. The VaR is a central case – not all cases.

Please remember that past performance is not a guide to future performance. But history is useful in enabling you to explore what sorts of investments suit your circumstances and objectives. Statistics below as of 26th October 2021.