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How we Invest

Attitude to Risk

How we Invest

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“Counterparty Risk” & “Investment Risk”.

Risk is the threat of losing money that cannot be recovered quickly or, sometimes, at all. Neither type of risk can be avoided but both can be managed through good judgement, by diversification and by dealing with only the strongest counterparties.

The first form of risk that all investors face is “Counterparty Risk”.

This is the risk of failure on the part of the institution that holds the investor’s cash and investments. It is a risk that hardly ever crystallises but if it does it can be disastrous so it should never be under-estimated or lost sight of.

Typically, investors use a custodian bank to hold their investments. The investments should be held direct and to their order. They should be protected even if the bank fails. Trustees and Investors need to satisfsy themselves about their custodian arrangements to make sure these protections are part of their contract.

The position of cash balances is different. Cash balances at banks risk being frozen or even lost in the event of bank failures, however unlikely. Therefore, it is important to deal with a strong bank and take the added precaution of keeping short dated government bonds under active review as a safe haven alternative to cash deposits at times of extreme stress within the banking system.

All our clients use a large professional custodian bank separate from Pan Asset. Many use Bank of New York Mellon who offer a competitive service and are one of the biggest and most experienced in this field.

The second form of risk that all investors face is “Investment Risk”.

This is the risk inherent in the individual investments themselves and takes the form of oscillations in general market levels and the risk of the total loss of individual investments.

Investment risk is everywhere in financial markets – it cannot be avoided but it can be managed. It can be taken in varying degrees and it can be mitigated by good judgement and through the diversification provided by our use of Exchange Traded Funds (ETFs).

Risk management is integral to our investment process.

One part of our risk management consists of identifying where risks lie and understanding what they are, how big they are and what factors might trigger them. This is harder than it sounds because risk has many ways of disguising itself and rarely presents itself to investors in quite the same way twice.

The second part consists of gauging, in discussion with you, the degree or risk that you can afford and are willing to take in pursuit of your investment objectives and incorporating this into the construction of your investment strategy.

The third part consists of keeping the trade-off between risk and return in each asset class and in your portfolio under continuous review in order to satisfy ourselves that over time you will be properly rewarded for the degree of risk you are taking.

History shows that investment risk has been handsomely rewarded over time so it is well worth taking a degree of risk in pursuit of higher returns provided it is done carefully

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