Risks associated with investments

Risks associated with investments

Market risk
The risk arising from an investment in any kind of asset. Assets will be traded on their respective markets and their quoted price will be influenced by a number of variables, such as economic developments and the political climate. Some assets, such as equities, are more volatile and therefore involve a higher level of risk. Fixed income assets tend to be less volatile, although this will depend on the issuer. Their quoted prices are closely linked to interest rates. Increases in interest rates negatively impact the price of these assets.

Currency risk
When investing in foreign currency, i.e. in a currency other than the local currency, the performance of the investment will be influenced by exchange rate fluctuations.

Concentration risk
Sectoral, geographical, asset or any other type of concentration implies the assumption of greater risks because negative results in one of the assets will have a greater impact on the overall results of the portfolio, as it will have greater relative importance than in the case of a more diversified portfolio.

Counterparty risk
Counterparties’ failure to meet their contractual obligations may result in potential losses on the investment.

Country risk
Investment risk in emerging economies stems from the possibility of having to face the consequences of unstable governments, economies that are highly concentrated in certain activities and, in general, greater political, social and economic uncertainty.

Liquidity risk
Liquidity risk is defined as the difficulty of transforming your investment into cash. In the case of trading in certain assets, typically small-cap stocks or markets with low trading volumes, there may be restrictions on unwinding positions which could affect the sale price and therefore the return.

Credit risk
Refers to the failure by an issuer of fixed-income assets to meet its obligations with respect to the payment of interest, principal, or both.

Interest rate risk
Exposure to changes in market interest rates can have an impact on investments, such as difference between the interest rate review periods or maturity dates of investment transactions relative to borrowings.

Derivative risk
Investment in derivatives (futures, options, swaps, etc.) is subject to market, leverage, counterparty, correlation, and liquidity risk. Leverage risk means that the exposure to the underlying asset is much greater than the amount invested and therefore the impact on performance could be disproportionate to the investment made. Correlation risk measures the potential for losses resulting from adverse changes in the correlation between the derivative and the underlying asset (of whatever type). All risks combined may cause the loss to be greater than the capital invested in the derivative.

Inflation risk
Fluctuations in inflation may impact the profitability and value of an investment.

Sustainability risk
High sustainability risk in an investment may result in a decrease in the price of the underlying assets and therefore negatively affect the fund’s net asset value.

Valuation risk
Investments in unlisted securities are valued using discounted cash-flow valuation models discounted at a market rate based on the type of asset involved, comparables and the associated potential risks and opportunities. These methods are based on estimates or comparables which introduce a subjective element and could potentially limit liquidity.