Matching your Attitude to Risk
One of the most important considerations with any investment is to balance your attitude to risk with your desire for positive returns. Are you investing for retirement or looking to save for a luxury holiday? Your age is also important: if you are a younger investor saving for a pension you may be more likely to take higher levels of risk due to the greater length of time to recover short-term losses. After making sure that you have a comprehensive picture of your personal and financial circumstances, risk profiling measures the balance between risk and return that you are prepared to accept.
Once you have gained an understanding of the extent to which you can tolerate a potential short-term loss while pursuing a long-term gain, you can begin to build your investment portfolio. The more accurate your understanding of your risk profile, the greater the chance of achieving the most suitable investment mix for your needs. How is risk measured?
All investments involve some risk. Risk is a fact of life for any investor. There's no avoiding it, investing and risk go hand-in-hand. The truth is that understanding risk is less risky than not investing at all. Thanks to inflation, there's even risk in doing nothing. To earn rewards you have to assume some level of risk. If you minimise risk you may also minimise your chance of achieving your goals. The most common measure of risk is the extent to which the value of the assets in an investment moves up and down over a given period, relative to their long-term average value. This is often referred to as the volatility.
Volatility is a statistical method that measures how much a series of values move up and down around its average. The higher the volatility number, the less consistent the historical performance of an investment has been. Investments with higher volatility are considered to be riskier that those with lower volatility. Although their potential for upwards swings is greater, so is their equivalent potential for downward movement. Until recently, some of the measures of risk for various investments have been somewhat broad-brushed. Many investors have been categorised on three levels: 'cautious', 'balanced' or 'aggressive'. However, the more accurate your risk profile, the greater the chance of recommending the most suitable investments for your needs.
Old Mutual (Skandia) has designed it's easy to understand risk profiler using risk numbers 1 to 10, 1 being cash based investors and 10 being pure equity based investors. This allows clients to more accurately assess their attitude to risk. The following table demonstrates the range of annual 'expected returns' for the Old Mutual Risk Profiles 1 to 10 and the average of all possible returns within the range of each risk level.
The figures should not be taken as a projection of the likely returns from the Old Mutual (Skandia) risk levels. They show the implied volatility and mean expected return of Old Mutual (Skandia) risk levels 1 to 10 to two standard deviations (this is often described as a 95 % confidence level). Figures are shown net of tax and underlying manager fees.
Spectrum - Managing your investment needs
The Old Mutual Spectrum Funds range then use Strategic asset allocation backed by a mathematical formula to produce the best possible combination of assets (equities, bonds, property and cash) to achieve the investor's goals over the life of the investment. The Spectrum funds combine Individual investment asset classes into a bespoke investment portfolio via a process known as Mean Variance Optimisation. The aim is to optimise the asset allocation so as to achieve the highest expected level of return for a given level of risk.
The Spectrum solution offers a range of six funds, designed to meet the requirements of investors with an Old Mutual (Skandia) risk level of 3 to 8. Historically more than 95% of investors fall within risk profiles 3-8, which is why the Spectrum Funds have been built to match these profiles.
Staying on Track
As the basis of the Spectrum funds is that their asset allocations aim to achieve the highest expected return for each risk level, it is vital that the funds continue to remain in line with the ever changing investment market. Together with advice from leading Global Consultancy Towers Watson, the Spectrum Funds asset allocations are reviewed on a quarterly basis to ensure that they continue to meet the level of risk that they are designed to achieve and that they reflect the current economic outlook.
Blending the assets in the fund
Old Mutual's (Skandia's) Global Investors dedicated multi manager team is the fund manager for the Spectrum range. It was founded on the principal that no single fund management group can be the best at managing every asset class. Rather than managing stocks directly, it concentrates on "managing the managers" by blending together portfolios of high quality investment managers who are experts in their own particular fields. Old Mutual Global Investors has employed this principal in selecting the underlying investments for the Spectrum range of funds. Many of the investments offered in the funds are normally only accessible to institutional investors or the very wealthy, but are available to you as a result of Old Mutual Global Investors size and buying power.
Expertise that you can trust
The award winning multi manager team within the Skandia Investment Group, was merged with the Old Mutual Asset Managers to form Old Mutual Global Investors in March 2013. At the end of 2012 the companies assets under management was £13.5bn. Old Mutual Global Investors is part of Old Mutual Wealth. Distribution spans key international markets including the UK, Europe, Asia, the Americas, South America and the Middle East.