Page 106 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 6 Investment risk

the ones that must be avoided. One objective of risk/return profiling is to identify such funds (see the
risk/return profile charts in fact sheet tips).
CISs are typically designed to reward with greater returns those investors who are prepared to take
bigger risks. Long term studies of the performance of different asset classes (like property, bonds,
cash and equities) invariably show the superior performance of the equity market over the long
term. Over the vast majority of 10-year periods, historically, equities have on average outperformed
property and bonds.
But what does it really mean when we say that shares are more risky than fixed deposits? Is this
always true, or only true for certain shares? Is it true regardless of the investment term (how long you
invest for), and is it true whether you invest in SA or the US?

Figure 6.1: Scaling down risk with age Types of risk
Investors who have a feel for different types of
investment risk are in the best position to quantify
risk, balance the risk, or decide whether the risk is
worth taking.

Market or benchmark risk
Benchmark risk is the risk inherent in a particular
market, like the SA equity market, the US bond
market, or the local property market. Some low
yielding interest bearing investments could be
said to be free of market risk, but the more exciting
investment options usually have inherent risk. Equity
markets, for example, just don’t go up in a straight
line, but suffer minor corrections and more severe
market crashes during their long term climb.
In the broadest terms, market risk refers to the threat of a general decline that affects all market
constituents. A lowering of the repo rate by the central bank, for example, causes all interest rates
to fall and impacts all interest-based products. Similarly, economic recession negatively impacts
the profits of most businesses and may lead to a general decline in share prices. The pessimism
that accompanies a recession typically causes an indiscriminate sell-off, meaning that even listed
companies well-placed to weather a recession suffer falling share prices. As the saying goes, a
falling tide lowers all ships.
Market risk is also inter-linked in interesting ways. For example, smaller markets (like SA) are often
“led” by larger markets (like the US). Bull and bear runs on the JSE, for example, have nearly always
followed, to a significant degree, the ups and downs of the major US stock markets. Share markets
are also affected by the interest rate environment and vice versa. Rising interest rates, for example,
can trigger an outflow from stock markets into lower risk, fixed interest products.
Understanding benchmark risk helps you to pick the most appropriate market (or markets) for
particular circumstances. Because equity markets and bond markets are volatile, they are often not
a good choice for short term investment (one to two years).
Although market risk almost “supersedes” many other risk factors, it is difficult to see market risk
in isolation. In other words, the way that market risk relates to a particular fund depends on the extent
to which that fund is representative of “the market”.
The JSE All Share index, for example, contains around 125 shares. The S&P500, a major US
index, contains 500 shares. Even these benchmarks are not, of course, fully representative of
“the market”, but they are sufficiently broad-based
to be regarded as good proxies. By contrast, some
Bear Market funds only hold 30 or 40 shares, making them much
A bear market is a persistent and prolonged less diversified than a market index. Furthermore,
decline in market prices. The opposite of a the fund may have overweight positions in a small
bull market. number of shares.

104 Profile’s Unit Trusts & Collective Investments September 2025