The risk measure is the guide as to the likely number of negative annual returns each fund may experience over any 20 year period. As the funds do not have a 20 year history we have decided to look at the performance of proxy indices over the previous approximately 20 year period.
Where appropriate, we have chosen the All Ordinaries Index and other appropriate proxies, rather than each fund’s benchmark alone (S&P/ASX 300 index for the Equity Fund, Reserve Bank cash rate for the Stable Fund and the custom index for the Balanced Fund), because each fund’s investment universe may not be confined to the constituents of its benchmark index. For example, in respect of the Equity Fund, the market capitalisation of the companies included in the All Ordinaries Index amounts to over 95% of the value of all shares listed on the ASX.
We then looked at the proportion of negative years in the previous approximately 20 year period, adjusted to take into account each fund’s investments class (for the Equity Fund, this is predominantly ASX Listed Securities, for the Stable Fund, it is a mixture of cash and ASX Listed Securities and for the Balanced Fund it is a mixture of global and domestic equities, fixed income and commodity-linked investments). We then assigned a risk rating to each fund based on the following seven categories provided for in the Standard Risk Measure guidance issued jointly by AFSA and the FSC in July 2011.
| RISK
BAND |
RISK
LABEL |
ESTIMATED NUMBER OF NEGATIVE ANNUAL
RETURNS OVER ANY 20 YEAR PERIOD |
| 1 | Very low | Less than 0.5 |
| 2 | Low | 0.5 to less than 1 |
| 3 | Low to
Medium |
1 to less than 2 |
| 4 | Medium | 2 to less than 3 |
| 5 | Medium
to High |
3 to less than 4 |
| 6 | High | 4 to less than 6 |
| 7 | Very High | 6 or greater |
The risk measures that we determine are not complete assessments of all forms of investment risk. For instance, the measures do not detail what the size of a negative return could be, or the potential for a positive return to be less than an investor may require to meet their objectives. Further, the risk measures do not take into account the impact of administration fees and tax on the likelihood of a negative return. Investors should still ensure they are comfortable with the risks and potential losses associated with their chosen investment options.