Fundweb article: Fifty Shades of Risk

Risk and capacity for loss are rightly placed at the centre of investment advice.  These factors help determine investor suitability. However, where assessment of risk can fall down is when types of investment are ‘lumped’ together as being all of the same risk level based solely on their title.

This isn’t always reflective of the real risk of an investment and it is important to look beyond the name of a product.

We often see this in the EIS space.  We agree that EIS should be considered as high risk at the outset of consideration; after all, investing in unquoted and often illiquid small businesses carries potentially greater risk than a stock market investment.  However, EIS propositions themselves cover a broad spectrum of risk, rather than being homogeneous.

At one of the EIS risk spectrum; you might have a very high risk, but targeting high rewards, seed EIS which invests in very early stage businesses but has the potential to unearth a global giant.

At the lower end of the risk spectrum you might have a renewable energy EIS (until the end of March 2015) where derived income could be underpinned by locked-in government subsidies – potentially over 60 per cent of income could be guaranteed via Renewable Obligation Certificates or Feed in Tariffs. To instantly, and without consideration, label both of these products as being of the same risk would be incorrect.

We are in constant dialogue with advisers, both long-standing and new, and often speak to advisers who instantly dismiss EIS because “it’s high risk”. However, we have witnessed matters where this attitude has led to investors’ tax considerations not being dealt with

Simply dismissing EIS could be detrimental to clients so should be considered as part of an advisers full toolkit.

Attitude to risk and capacity for loss should be at the centre of any investment decision, so understanding the true risk of an investment is important. Equally, knowing the fund manager and the steps they take to mitigate risk is a necessity.

Ian Warwick is managing director at Deepbridge Advisers Limited.

 

To read the full article please visit: http://www.fundweb.co.uk/opinion/deepbridge-fifty-shades-of-risk/2018804.article