The risk measure is Allan Gray’s 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 the All Ordinaries Index over approximately two previous 20 year periods for the Equity Fund and one previous 20 year period for the Stable Fund.

We have chosen the All Ordinaries Index, rather than each fund’s benchmark alone (S&P/ASX 300 index for the Equity Fund and Reserve Bank Cash rate for the Stable Fund), because each fund’s equity investment universe is not confined to the S&P/ASX 300 index and 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 20 year periods, adjusted to take into account each fund’s investments class (for the Equity Fund, this is predominantly ASX-listed securities and for the Stable Fund, it is a mixture of cash and ASX-listed securities). 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.