Tracker Funds
Tracker funds are passive. They don’t try to beat the market, and simply aim to mirror the performance of an index. Therefore their underlying investments will replicate the components of a market index (the FTSE 100, for example). Due to this, tracker funds are typically far cheaper than actively managed funds (funds that have a manager who is aiming to beat a benchmark).
Now we will look at more specific aspects of investment risk. Just as funds are classified into different sectors (classified by the UK’s Investment Association (IA)), there are sector specific risks, geographical risks and industry risks. Different funds carry different level of risk dependent on the fund’s investment objectives, and the geographical region and industry sector in which they invest. Please note that this list is not a substitute for familiarising yourself intimately with the relevant fund literature.
Bonds: bonds are loans to governments and companies. Bonds issued by major governments and larger companies are considered to be more secure than those issued by emerging markets or smaller companies. Historic yields should not be used as an indication of future returns. Bonds are sensitive to interest rate changes.
Some bond funds may invest in non-investment grade debt – bonds that aren’t rated by a credit rating agency. Bonds may be downgraded by rating agencies.
In difficult market conditions reduced liquidity in bond markets may make it harder for a fund manager to sell assets at a quoted price.
Emerging Markets: emerging markets may be subject to increased political and therefore economic and regulatory instability. Emerging markets investments may therefore demonstrate high levels of volatility, and can be more difficult to sell than developed market securities.
Property: property valuations are generally a matter of opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Property investments can be illiquid; that is, certain assets could become hard to value or sell at a specific time or price. Property investments can be more difficult to buy and sell than investments in bonds and equities.
Smaller Companies: smaller companies are generally less well researched and not as established as larger companies, and therefore shares in therefore their shares can be more volatile, and not as liquid as larger company shares. Investments into smaller companies are therefore generally said to be inherently more risky than investments into larger companies.
Specific Sector: focussed funds that invest solely in a specific sector (such as precious metals, technology etc.) are generally considered to be more risky than those which spread their investment across multiple sectors.
Targeted Absolute Return: absolute return funds broadly endeavour to generate consistently positive returns in all market conditions, but they do not guarantee a positive return. Some sector funds may also utilise hedge fund strategies, which can be highly risky, and employ complex investment instruments such as derivatives.
And now we turn to broader investment risks. As above, this list is not exhaustive.