The most common definition of risk is the magnitude of short term fluctuations in financial markets.

The most common definition of risk is the magnitude of short term fluctuations in financial markets. This is also referred to as ‘market volatility’. This is only a one-dimensional view of risk.

We define investment risk as the probability of not meeting investment goals. The ultimate hazard to an investor is that they do not have enough income and/or growth to meet their current and future liabilities.

The most common catchphrase for risk measurement in Diversified Growth Funds (DGF) is normally in relation to equities: ‘similar return with less volatility over an investment cycle’. This measurement assumes that investors are only interested in reducing risk in comparison to equities, which may have an element of truth, although misses the point.

DGFs are designed to reduce the uncertainty in achieving long term goals. For objective-based funds we propose that investors have a multi-faceted view of risk.

When evaluating the risk profile of an objective-based investment, the following questions should be considered.


1. Has the fund delivered the required return over the investment horizon?

Achieving the investment return over the investment horizon is a key criteria in evaluating objective funds. Being too conservative could be risky as the fund may fall short of meeting its investment target.


2. How often do large capital drawdowns occur and how long does it take for the portfolio to recover?

A drawdown is the peak-to-trough decline over a period for an investment. The maximum drawdown provides an indication of the worst loss one would have experienced had they withdrawn their capital at an unfavourable time in the market cycle. It is also important to examine how long the portfolio took to recover from the loss. The portfolio needs to work harder after a drawdown; a 20% loss requires a 25% return to recoup the losses.


3. How did the fund perform after adjusting for risk?

The Sharpe Ratio is a measure for calculating volatility-adjusted excess return for a fund. It is calculated as the return earned in excess of the risk-free rate per unit of volatility. This provides investors with a tool to evaluate funds with similar return objectives and investment horizons.

The First State Diversified Growth Fund was designed to maximise the likelihood of meeting our clients’ investment objectives. We look at how this is achieved through a dynamic and flexible investment framework that allows us to navigate through different market environments. Ultimately our focus is on delivering sustainable, long term investment outcomes for our investors defined as a return of RPI + 4% (gross of fees) over a 5 year period. As for risk, we aim to minimize drawdowns over 12 month period, to protect against inflation over a 3 years horizon and to achieve the return investment over a 5 year period, although as with any investment this cannot be guaranteed.

Important Information

This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered and does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this information.

References to “we” or “us” are references to First State Investments.

In the UK, issued by First State Investments (UK) Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743. Outside the UK within the EEA, this document is issued by First State Investments International Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registered number 122512). Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB number SCO79063.

Certain funds referred to in this document are identified as sub-funds of First State Investments ICVC, an open ended investment company registered in England and Wales (“OEIC”). Further information is contained in the Prospectus and Key Investor Information Documents of the OEIC which are available free of charge by writing to: Client Services, First State Investments (UK) Limited, Finsbury Circus House, Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting Telephone calls may be recorded. The distribution or purchase of shares in the funds, or entering into an investment agreement with First State Investments may be restricted in certain jurisdictions.

Representative and Paying Agent in Switzerland: The representative and paying agent in Switzerland is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. Place where the relevant documentation may be obtained: The prospectus, key investor information documents (KIIDs), the instrument of incorporation as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland.

First State Investments (UK) Limited and First State Investments International Limited are part of Colonial First State Asset Management (“CFSGAM”) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments elsewhere. The Commonwealth Bank of Australia (“Bank”) and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of the Bank or its subsidiaries, and are subject to investment risk including loss of income and capital invested.