What is risk management?
The principles of risk management when it comes to investing largely centre around assessing potential losses and taking action in an attempt to mitigate them.
For example, an investor seeking to reduce risk in their investment portfolio may decide to invest more in cash or bonds instead of shares, as cash and bonds generally have a lower risk profile.
In a low interest rate environment, the potential capital growth and income benefits of investing in shares are particularly apparent. However, some investors may remain concerned about the effects of volatility and the potential for significant losses when markets experience sustained falls.
Investors seeking diversified equity exposure but concerned about uncertain financial markets may wish to consider the Betashares managed risk funds.
The funds provide exposure to either Australian or global shares, while seeking to mitigate the impact of market volatility and the risk of large drawdowns during declining markets.
How do the funds’ risk management strategies work?
The risk management strategy used by the Managed Risk Series aims, over market cycles, to provide exposure to upside potential in rising markets while avoiding most of the downside in periods of decline. To achieve this, the Funds combine:
- Exposure to shares – providing investors with the potential for capital growth and dividend income, and
- An active risk management strategy, that seeks to reduce volatility and defend against losses in declining markets.
The risk management strategy involves actively selling equity index futures. Selling futures can generally be expected to generate a positive return when the sharemarket declines, and a negative return when the sharemarket rises.
As part of the strategy, sharemarket volatility is monitored daily, and when volatility rises, which is often characteristic of a falling market, a ‘handbrake’ is applied to reduce the impact of major market declines. The handbrake is implemented by selling equity index futures contracts, which reduces investors’ exposure to shares in falling markets, while still allowing a level of participation in rising markets.
As a result, in falling markets, the funds have an opportunity to outperform the underlying share market, as the risk management strategy seeks to reduce the impact of market falls on the value of the portfolio.
In rising markets, the funds have an opportunity to rise in value, however not by the same amount as the rise in the underlying sharemarket due to the implementation of the risk management strategy, which means the Funds will not be fully invested in the sharemarket.
Who might the managed risk funds be suitable for?
The Betashares managed risk funds could be considered by pre-retiree, retiree or self-managed super fund investors.
By using the managed risk funds, investors have the potential to:
- Benefit from sharemarket returns with the potential for reduced downside in declining markets
- Obtain exposure to an income stream from the dividends of the Australian or global sharemarkets
- Benefit from reduced volatility and a smoother investor experience despite changing market conditions
- Gain cost-effective exposure to a diversified portfolio of shares in a single trade on the ASX
Considerations for Betashares managed risk funds
It’s important to note that the application of the risk management strategy will generally mean that the below funds are not fully invested in the sharemarket during rising markets, and so the upside potential may be less than a comparable fund that does not employ a risk management strategy.