Disclaimer:

Capital at risk. OCF may vary dependent on platform. Additional wrap platform charges will apply. Actual model portfolio may differ to the details on this factsheet due to fund and fund share class availability on platforms.

The Information in this document is not intended to influence you in making any investment decisions and should not be considered as advice or a recommendation to invest. Any information provided may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors and relevant offering material. Past performance is not necessarily indicative of future results.

Risks:

Our services provide exposure to various financial assets such as equities and bonds, all of which carry the risk of capital loss. The return a client can expect from an investment is linked to the type and amount of risk associated with it. In this regard, it is crucial to understand the different types of risk that can affect the performance of an investment.

The key risks associated with our model portfolios are described below, but this list is not exhaustive.

Clients investing in a Binary Capital Model Portfolio must take the time to understand the risks involved.

General Risks

The price/volatility risk of an investment refers to the rapidity with which the price of a particular investment moves up and down. High volatility indicates that the price of an investment changes rapidly over short periods, while low volatility indicates infrequent price changes. Various factors can cause these price movements, such as changes in interest rates, political factors, or company-specific events. Equities, for instance, are generally more volatile than government bonds, which are less volatile than cash. However, investors must understand that the higher the volatility of an asset, the greater the potential for both positive returns and losses. Therefore, there is always a trade-off between risk and reward. It is crucial to keep in mind that investments and the income from them may decline, and clients may get back less than the amount invested.

Inflation risk is the long-term effect of inflation on an investment’s purchasing power. Inflation can erode the value of an investment and reduce its ability to buy assets at future price levels. While inflation risk is present in all investments, some are more susceptible than others. For instance, cash is among the most vulnerable asset classes to inflation risk. If the interest rate payable on a cash deposit in a bank or building society remains below the inflation rate over time, the value of that cash will erode in real terms. In recent years, interest rates available on deposit accounts have been generally lower than the prevailing level of inflation.

Underperformance Risk. All investments carry the risk that they will underperform their benchmark or fail to achieve their investment objectives. Various factors, including market conditions, economic cycles, company-specific risks, and investor sentiment, can influence this risk. Even a well-diversified portfolio may experience periods of underperformance. High fees, inappropriate asset allocation, market timing, and behavioral biases can exacerbate the risk of underperformance. It is crucial to remember that past performance is not indicative of future results, and no investment can guarantee positive returns. Investors must have realistic expectations about their investments’ performance and adjust their strategies accordingly to mitigate underperformance risk.

Currency risk relates to all investments denominated in foreign currency. The value of foreign assets depends not only on the assets’ price movements in the local foreign currency but also on the movements of the exchange rate of the currencies against sterling. Investments denominated in foreign currency can be more volatile than those denominated in sterling due to fluctuations in exchange rates. These movements may cause the investment value to fluctuate favorably or unfavorably, independent of the underlying asset’s value.

Liquidity risk is the ease with which an investment can be bought and sold. Assets that have high liquidity are easily traded with a large number of buyers and sellers, such as the shares of large companies in developed countries like the UK. On the other hand, shares of relatively unknown small companies, where there is a narrow market for the shares, are illiquid assets. An investor holding illiquid shares may find it challenging to sell them, and it may take a considerable amount of time to find a buyer or sell them quickly, and at a reduced price. It is important to keep in mind that liquidity risks can affect investment performance.

Risks – Vehicles

Open-ended Funds

An investment fund allows multiple investors to pool their money together and invest in a portfolio of assets managed by professionals. This portfolio typically includes company shares and fixed income investments, and it provides diversification and reduces risk by spreading investments across a range of assets. By pooling funds, investors enjoy economies of scale, which means that costs are shared, resulting in lower costs compared to investing privately. Additionally, professional management can enhance investment returns. However, collective investments may be more expensive due to additional fund management fees.

The value of a collective investment scheme depends on the underlying asset values, so the value of the fund can rise or fall in line with asset values. Returns on company shares, and thus investment funds that invest in them, are not guaranteed. In difficult market conditions, there is potential for capital losses. Some collective investments may involve unquoted investments or property, which can be high risk and illiquid, making them challenging to sell. Exposure to foreign currency fluctuations could amplify potential losses.

Exchange Traded Funds (ETFs) – Physically Replicated

Exchange Traded Funds (ETFs) are investment vehicles that aim to match the performance of a benchmark index. ETFs can be physically replicated, meaning they invest in the underlying securities that make up the index in the same proportions as the index, or synthetically replicated.

When investing in physically replicated ETFs, investors should be aware of the same risks associated with the underlying securities of the benchmark index. For example, if the benchmark index is an equity index, then investors in the ETF are exposed to the same risks as those for equity funds. Similarly, if the benchmark index is a bond index, then investors in the ETF are exposed to the same risks as those for bond funds.

Physically replicated ETFs also carry the risk of not fully replicating the benchmark index, which can occur due to market liquidity, trading costs, or regulations. Additionally, some physically replicated ETFs may engage in securities lending to generate additional income for the fund, but this carries the risk that the borrower may fail to return the securities in a timely manner or at all, leading to potential losses for the fund.

Lastly, some physically replicated ETFs may use derivatives to replicate the benchmark index returns, which involves counterparty risk. This means there is a risk that the counterparty may default and not be able to honor the contract, leading to potential losses for the fund.

Investors should carefully consider these specific risks before investing in physically replicated ETFs.

Investment Trusts (UK Listed)

Investment trusts are collective funds listed on a stock exchange that pool money from multiple investors. Unlike open-ended funds, investment trusts have a set number of shares traded on the stock exchange. The share price of an investment trust is determined by supply and demand for the shares, and it can trade at a premium or discount to its net asset value (NAV). The concept of investment trust discounts and premiums is a key risk for investors to consider.

Investment trusts can use borrowing, also known as leverage or gearing, to enhance returns. This increases both the volatility and the risk level of the investment. The impact of leverage can lead to sudden and large rises and falls in value, and interest costs from borrowing can increase the required rate of return to break even. Gearing can produce stronger returns if used successfully, but it also increases the overall risk level of the investment. Investing in investment trust shares is subject to similar risks as investing in company shares. While the share price of an investment trust may be influenced by the performance of the underlying investments and NAV, there is no guarantee that a discount will close or that an investment trust will move to a premium even if the underlying investments are performing well.

Risks – Asset Classes

Cash

Cash is a common form of investment that includes savings or deposit accounts which may earn interest on the deposited amount, though this is not always the case. Investment managers may keep a certain amount of cash in a portfolio to make use of opportunities that arise. Cash can also help reduce the risk of a portfolio’s value decreasing during times of market decline.

Although cash is relatively low-risk in the short-term, there is a possibility of capital loss if the institution holding the deposit defaults. However, instant access deposit accounts allow for easy access to cash whenever needed. One potential drawback of holding cash is that it may not provide a return that keeps pace with inflation, which can erode its purchasing power over time.

Bonds

A fixed income investment is a security that pays a known return, often with lower risk than equities. Bonds are the most common form of fixed income security – these are loans mainly issued by governments, companies or other organisations. The payments received from bonds are typically fixed (hence the term ‘Fixed Income’) which means that inflation can erode their ‘real’ value to some extent.

When an investor purchases a bond, they are essentially lending money to the issuer in exchange for regular interest payments over a specified period. At the end of the bond’s term, the issuer promises to repay the initial investment.

Holding bonds in an investment portfolio can partially reduce the level of risk in a portfolio. The price of bonds often moves inversely to changes in cash interest rates.

There are various types of bonds, ranging from those issued by robust governments and countries, where the risk that an investor will not be repaid tends to be very low, to corporate bonds (bonds issued by companies) where the risk is generally higher.

Government bonds can generally be bought and sold easily while corporate bonds vary more in terms of the ease with which they can be traded.

If an issuer is in financial difficulty, there is an increased risk that they may be unable to meet the payments to bondholders that they are due to make. In this event, little or no capital may be recovered and any amounts repaid may take a significant amount of time to obtain.

The value of bonds can generally be expected to be more stable than that of company shares. However, in some circumstances, the value of most bonds can also be volatile, and prices can go up or down. The factors which are likely to have an impact on the value of a bond are:

– The financial position of the bond issuer: If the issuer experiences financial difficulties or has a high level of debt, this can lead to a downgrade in the credit rating of the bond, which can cause the bond’s value to decrease.

– Changes to market interest rate expectations: As mentioned earlier, bond prices are often inversely correlated with interest rates. If interest rates rise, the value of existing bonds with lower interest rates will decrease.

– The bond issuer’s credit rating: A bond’s credit rating reflects the issuer’s ability to repay the amounts payable when they fall due. A lower credit rating indicates a higher risk of default, which can cause the bond’s value to decrease.

– The length of time until the debt falls due for repayment: Longer-term bonds are generally more sensitive to changes in interest rates than short-term bonds.

– Where the bond ranks in terms of the issuer’s other liabilities (referred to as the ‘seniority’), and the quality of any security available: Bonds that are more senior in the issuer’s capital structure and have better collateral or guarantees are generally less risky.

Equities

Equities, also known as company shares, are commonly used by investors who are looking for long-term growth in their investments. Each share represents a stake in the ownership of a company that is listed on a stock exchange, like the London Stock Exchange. Shareholders are entitled to receive dividends, which are payments made out of the company’s profits. Although a company is not obliged to pay dividends, its management can be held accountable by shareholders if they don’t provide a reasonable return. Over the long term, company shares have historically provided a reasonable return, along with some protection against inflation. However, past performance is not a guarantee of future performance.

It’s important to note that returns on company shares are not guaranteed, and the price of a company’s shares can go up or down. If a client invests in international shares denominated in a currency other than sterling, the price variability may be higher or lower than that of UK shares once foreign currency exchange rates are taken into account. Investing in equities exposes clients to the economic risks faced by the company, and the value of their investment can fall as well as rise. The price volatility of equity markets can change quickly and cannot be assumed to follow historic trends. In difficult market conditions, clients may suffer irrecoverable capital losses. In the worst-case scenario, a company could fail, and its equity could become worthless.

Certain company characteristics may mean a heightened level of equity investment risk. For example, a company’s market value may be relatively low, its products may be undiversified, or it may rely on a single market as a major source of income. Some companies may also have a significant reliance on borrowing as a source of finance or have major income sources that are seasonal or cyclical in nature. Companies trading primarily in developing countries or in countries where legal property rights may be difficult to enforce may also be higher-risk ventures.

When investing in equities, it’s important to consider the risks involved. Collective funds, such as unit trusts and investment trusts, which have a diversified portfolio of holdings, can help manage these risks. Alternatively, investing directly in a wide range of shares that give exposure to a variety of industries, countries, and currencies can also help mitigate risks. However, it’s important to note that shares of some smaller companies may not be readily sold, and their value may be difficult to determine. Overall, the risks involved in investing in company shares can be managed through diversification and careful consideration of the characteristics of the companies being invested in.

Absolute Return

Absolute Return funds aim to deliver positive returns in any market condition, but returns are not guaranteed. Absolute Return is a very broad category that encompasses most asset classes and investment techniques. An Absolute Return fund may invest in any asset class, such as equities, bonds, currencies, commodities, or derivatives. Absolute Return funds employ various investment strategies, many of which are similar to the strategies employed by hedge funds. For example:

– Short selling: selling securities and buying them back at a later date if a security price is expected to fall.

– Relative value trades: selling one security while simultaneously buying another one with similar characteristics.

– Trend/momentum trades: buying or selling securities based on their recent performance.

– Curve/duration trades: buying or selling bonds with different maturities according to portfolio managers’ interest rate expectations.

Absolute Return funds can be complex, and it’s important to carefully consider the details of individual funds to try and reduce investment risk. While Absolute Return funds aim to achieve positive returns, this objective is not guaranteed. Additionally, Absolute Return funds often invest in derivatives which can have additional risks associated with them. Selling assets (“going short”) exposes investors to a higher level of risk than buying securities, as losses are potentially unlimited if the price of sold securities continues to rise. Furthermore, there is a regulatory risk as the Financial Conduct Authority (FCA) may place a ban on short sales. Absolute Return funds may employ leverage either through borrowing or through derivative positions. While this can enhance potential returns, it also exaggerates potential losses. Finally, Absolute Return funds often take positions in exotic or thinly traded assets to earn extra returns from holding illiquid assets.

Infrastructure

Infrastructure refers to investments in vital economic assets, such as roads, railways, airports, oil and gas storage and transportation facilities, marine ports, and electricity and water utilities. Investing in infrastructure can offer potential for capital growth as well as a degree of protection from inflation.

Infrastructure investments generally generate relatively stable levels of income, although this cannot be guaranteed. However, one key risk to investing in this sector is that companies involved in infrastructure-related industries are subject to environmental considerations and government regulation, which may impact returns to investors.