Page 102 - Profile's Unit Trusts & Collective Investments - March 2026

Chapter 6 Investment risk

The conduct standard requires managers to:
Bear Market R Document, establish and implement an
A bear market is a persistent and prolonged appropriate, efficient and effective risk
decline in market prices. The opposite of a management framework which consists of
bull market. a risk management strategy, policies, and
related procedures, and tools for identifying,
assessing, monitoring, reporting, and mitigating risks, including conduct risk specifically, that
may affect its ability to meet its obligations and responsibilities towards investors, collective
investment schemes and portfolios;
R Include in the risk management framework a risk appetite for the manager that is aligned with
its risk management strategy;
R Establish, maintain and operate within a system of effective internal controls designed to
ensure that the risk management framework operates effectively and that regular risk-based
monitoring and evaluation ensures the adequacy and effectiveness of the systems, processes,
internal controls and measures to address and identify deficiencies;
R Establish and maintain an effective risk management function as part of the manager’s overall
governance and risk management framework;
R Implement appropriate liquidity risk management measures to assess each portfolio’s ability
to respond to extreme or unfavourable economic or financial positions, such as undertaking
stress and scenario tests on a periodic basis.
Risk profiles of funds
In order to choose appropriate investments, investors need to evaluate their financial
circumstances, their financial goals, their risk capacity and their risk appetite. All investors want the
highest possible returns for a given or acceptable level of risk, but not all investors see risk the same
way. It is therefore important to define each investor’s risk profile, both in terms of risk capacity and
risk appetite.
The collective investment schemes industry tends to simplify risk profiles into three main
categories: aggressive, balanced (or moderate), and conservative. (Sometimes this is fleshed out
slightly into a five-point scale which includes moderately-aggressive and moderately-conservative.)
These categories are usually not defined or quantified by the managers and intermediaries that use
them, save for the assumption that everyone understands intuitively that “moderate” implies greater
risk than “conservative”, and so on. But the exact characteristics and precise dividing lines of risk
categories are seldom addressed.
A problem with risk profiling is that it doesn’t always help the investor choose the right fund,
mainly because fund riskiness varies enormously within sectors. As at January 2026, for example,
annualised volatilities of general equity funds still show considerable variation. Equity General funds
range from 6.58 to 16.52, while Equity SA General funds range from 8.80 to 13.88. Based on volatility,
the least risky general equity funds (6.58) are less risky than some multi-asset funds. For example,
Multi Asset–Low Equity funds range up to 8.87, while Multi Asset–Medium Equity funds range up
to 9.11. A risk assessment that puts an investor in the “general equity” category, therefore, actually
provides very little guidance – the funds in the sector range from relatively low to high volatility.
Another problem is that volatility changes over time. Periods of market stability tend to produce
narrower volatility ranges, while periods of market stress lead to sharp increases in volatility. The
coronavirus-triggered crash of March 2020 and the subsequent market recovery again caused
volatilities to rise significantly across equity sectors. Although volatility moderated in the years
following the pandemic, differences across sectors remain substantial.
Shifting volatilities makes it difficult to use quantitative measures of risk when assessing funds: a
fund or sector that looks low risk today might look high risk next year.
One reason that the industry favours sector-based recommendations is that the relative riskiness
of sectors (based on volatility) tends to be fairly constant: although volatility ranges might shift, the
average income fund is always less risky than the average general equity fund. But this is painting
with a very broad brush: sector-based recommendations are of little help when narrowing fund

100 Profile’s Unit Trusts & Collective Investments March 2026