Risk Management
Taupo Moana Funds (TMF)
Investment Objectives & Risk
Uncertainty is always and everywhere,
but risks can be identified and managed.
Various risks are present within any investment. The essence of risk management lies in maximising returns from investment, within an acceptable risk profile.
The four principal risks involved in an investment are as follows.
a. Credit risk
The risk that the party with whom you have invested funds (including banks and governments) is unable to repay those funds together with interest on the due date, or the risk that the company in whom you have purchased shares finds itself in financial difficulty. Obviously, the greater the credit risk, the higher the expected reward (return) that an investor will require. In general, investments in Government securities are considered to be the least risky option.
TMF assists you to manage credit risk by designing a diversified portfolio that spreads your investments across a range of securities and/or asset classes. The securities and/or assets fall within set credit rating parameters as agreed with the client.
b. Market risk
Changes in the economy, industry or world capital markets that may have an impact on local interest rates and equity prices. For example, interest rates may rise after you have invested money for a fixed period of time, or the NZD exchange rate may rise after you have invested in overseas markets.
TMF manages market risk by ensuring that your investment portfolio is within the asset allocation parameters most suitable to your market risk requirements.
c. Liquidity risk
This term is used to measure how easy it is to turn an investment back
into cash. A highly liquid asset is one that is very easily converted to
cash. The market will price a liquid asset at a premium to that of a nonliquid asset - all other things being equal. For example, most Maori land cannot be sold and therefore is a non-liquid asset.TMF manages liquidity risk by ensuring that your investment portfolio
matches the liquidity profile most suitable to your requirements.
d. Control risk
The risk incurred in the execution, control and monitoring of
investments. These risks include how transactions are settled (paid
for), how they are monitored to ensure that they are performing, how
interest and dividends are collected. The aim is to ensure that
investments are made only pursuant to the parameters set by the
investor to minimise credit and financial risks.To manage control risk, TMF uses the TMF System managed in
conjunction with Grosvenor Financial Services Group to provide
custodian and administration services for your investments.
It is important that investors give consideration to their investment philosophies in
order to establish their investment profiles. Investment risk should take into account
your current financial situation and be measured against your investment objectives.
The investor must be very clear about objectives, as this will ultimately define the
investment risk. In other words risk represents the possibility that investments will not meet the investor’s objectives. Viewed in this manner, what some people view as “risky” assets could actually represent less risk. For instance, if investors are looking to maximise returns over a 20-year period then equities can actually represent a low risk option. Therefore, it is always important to recognise that risk is a purely relative term, and that investment assets form only one side of the balance sheet. The liabilities (objectives) should carry relevant weight in any decision-making.