The value of investments and any income from them can fall and you may get back less than you invested.

Glossary

Brewin Portfolio Service provides exposure to financial assets all of which are subject to some form of investment risk.

It is important that you understand that the level of return you can expect from an investment you make is related to the amount and type of risk for that investment. Below, we outline some key broad categories of investment risk that can impact upon the performance of the Brewin Portfolios.

Volatility risk

Volatility is a measure of the relative rate at which the price of a particular investment moves up and down. If the price of an investment moves up and down rapidly over short time periods it can be described as having high volatility. If the price changes relatively infrequently, it can be described as having low volatility.

Some investments are more volatile than others – for example, company shares or ‘equities’ would generally be more volatile than government bonds, and cash would be the least volatile. However, it is important to understand that there is a ‘trade-off’ between the level of volatility you are prepared to accept and the return you can expect to achieve from an investment. As a general rule, the higher the volatility of an asset, there is not only the greater the potential for positive returns but also the greater the potential for losses.

Inflation risk

Inflation erodes the ‘purchasing power’ of your assets - i.e. it reduces how much they will be able to buy at future price levels. Of course, inflation risk can have an impact on all types of investment but some types are more at risk than others. For example, cash is among the asset classes most vulnerable to inflation risk. If the interest rate payable on a cash deposit in a bank or building society is consistently below the rate of inflation over time, then the ‘real’ value of that cash will be eroded. This is particularly relevant to market conditions such as those we have experienced in the last few years.

Currency risk

This form of risk relates to all investments denominated in foreign currency, for example Continental European company shares. These assets will generally be priced in the currency of the country of origin – Continental European company shares will generally be priced in euros. UK investors – whose investment portfolios will usually be priced in sterling – you therefore need to be aware that the value of the foreign assets that they own will depend not only on the price movements of the assets themselves in the local foreign currency but also on the movements of the exchange rate of the currencies against sterling. This can mean that investments denominated in foreign currency can be more volatile than those denominated in sterling.

 

BPS portfolios are invested in collective investment vehicles and within this the allocation is mainly to large, open ended, daily dealing, and ‘liquid’ vehicles (i.e., easily traded). In addition, certain collectives can undertake hedging and other activities to manage investment exposures, which may not be economical for individuals to undertake. The collectives that we use have access to certain asset classes. Further information on the types of asset classes that you may have indirect exposure to is below for your information.

Cash

Cash has virtually no risk of capital loss and can be readily available but frequently provides a return that is below the prevailing rate of inflation, meaning that the ‘real’ value of an investment falls.

Fixed income

Fixed Income investments (eg, a bond) represent a loan made by the investor. There are various types ranging from government bonds, where the risk that an investor will not be repaid tends to be very low, to corporate bonds where it is higher. As the creditworthiness of a bond issuer (the borrower) declines the return it pays for each new loan will rise. Loans to creditworthy borrowers will typically pay an interest rate above that of cash but could expose the investor to a loss if interest rates were to rise during the life of the bond. Loans to financially weak borrowers could incur a loss because the borrower has been unable to meet the repayments. The payments received from bonds are typically fixed, which means that inflation erodes their ‘real’ value to some extent. Government bond investments can be sold easily to release funds if required. Corporate bond investments (loans to companies) vary more in terms of the ease with which they can be bought or sold. Brewin Portfolios only invest in bonds via collectives; historically this has meant that the value of any investment can be realised on any given working day.

Equities

An investment in a company share will entitle the holder to the payment of any declared dividends. Shares are typically valued to reflect the value of current dividend payments and those anticipated from future years. Companies are not obliged to pay dividends but their management can be held accountable by shareholders if they do not provide a reasonable return. The income returns on company shares can give an indication of each company’s underlying profitability.

Company shares are typically more volatile than bonds. Profits are not fixed but tend to rise with inflation to some extent and so shares provide a means of protecting your wealth against inflation. Most shares are readily realisable in most market conditions. The Brewin Portfolios only invest in company shares through funds; historically this has meant that the value of the investment can be realised on any given working day. The price variability of international shares may be higher or lower than that of UK shares because of currency movements.

Alternatives

Commercial property

An investment in commercial property entitles the holder to rents paid by the tenant as well as the disposal proceeds should a property be sold. The income and value of property will be impacted by demand. Both factors should also provide some insulation against the erosion of wealth by inflation, too. Property is the least liquid of the asset classes the Brewin Portfolios invest in meaning that in certain market conditions it may be difficult to sell any holdings in property funds.

Absolute return

An investment in hedge funds provides the holder with exposure to a mixture of different investment strategies and securities, with the aim of delivering positive returns under a range of market conditions, subject to reduced levels of volatility.

For example, for Equities we use two indices - the FTSE All-Share for UK equities and the FTSE All-World ex UK for overseas equities.

The weighting of each of the individual indices in the overall benchmark for each Portfolio will depend on the asset mix for that particular Portfolio. For example, for Risk Level 6, the asset mix includes 67.5% Equities, broken down into 40% in UK equities and 27.5% in overseas equities. This means that 67.5% of the benchmark will be made up of equity indices - 40% in the FTSE All-Share for the UK equity component and 27.5% in the FTSE All-World ex UK for the overseas equity component. Please see the table below for details of the individual indices for each asset class (on the right hand side of the table) and their weightings in the bespoke benchmark for each Portfolio.

Composition of benchmarks for each Portfolio

*TR - Total Return is the return an investor receives when income is reinvested

The range of Alternative assets that can be used in client portfolios has changed over the years and prior to June 2005, the historic performance of the Alternatives asset class was wholly based upon the Property index. From June 2005, the historic performance the Alternatives asset class has been based upon both the Property and Target Absolute Return indices. This change represents the broader range of alternative options that have become available to investors over time.

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