Page 103 - Profile's Unit Trusts & Collective Investments - March 2026

Investment risk Chapter 6

selections. Matching a fund’s risk profile (conservative, moderate, aggressive) to an investor’s risk
profile is therefore only a first step. To fine-tune selections it is necessary to look at fund mandates,
historical volatility or risk-adjusted returns (on a fund basis), and sectoral and asset allocations.
Risk and reward
It is a universally accepted principle of investment that risk rises with the potential for higher
returns. Put more simply: the greater the chance you can make big money, the greater the chance
you can lose your shirt.
It’s important to remember that risk is not necessarily rewarded: some high-risk funds consistently
deliver mediocre returns. A high-risk investment that declines in value but later recoups its losses and
climbs to new heights will reward investors who are able to ride out the volatility. But there are always
tempting investments with historically high risk/return profiles that, due to economic or industry
changes, fail to generate returns for extended periods. Such “high risk/low return” investments are
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?
Types of risk Figure 6.1: Scaling down risk with age
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).

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