The Sovereign fund aims to achieve long-term growth, while spreading risk across a wide range of investments. It invests mainly in both UK and overseas shares along with fixed interest investments* and property. It may also invest in alternative investments, money market instruments** and cash. The fund may achieve this by investing in one or more other funds.
An investment can be called an 'alternative investment' if it is anything other than one of the traditional investments, such as stocks and shares, fixed interest investments or cash. An example of a type of alternative investment we invest in is the Absolute Return fund.
What is an absolute return fund and why do we invest in one?
This is a fund that aims to provide a positive return regardless of what is happening on the stock market. During periods of poor stock market conditions, these funds might not fall in value as much as a fund that invested solely in shares. But they may not increase in value by as much when stock markets are performing well. This means that investing in absolute return funds might help smooth the ups and downs associated with all investments in stocks and shares. We hope therefore that investing in absolute return funds will help us provide our investors with steady, gradual returns over the terms of their investments.
How much of the Sovereign fund has been invested in absolute return funds over the last year and how might this have affected the charges?
Over the last year (to 30th April 2012), the Sovereign fund has invested an average of 9.07% in an absolute return fund, the GAM Trading II fund. Investing in this fund has meant that the fund has paid additional costs of 0.08% over this same period.
What are the risks associated with my investment?
Investment in the Sovereign fund, as with most types of investment product, carries with it an element of risk. As the GAM Trading II fund invests (via other funds) in a very wide range of assets, there could be some additional risks or increased risk because of the investment in some of these assets.
All investments in stocks and shares, and other investments that are traded on a stock market, carry a risk that you could lose some or all of the money you have paid into an investment. You also need to be aware that this means that the value of your investment will go up and down over time. We have provided more detail on this risk in relation to the different types of asset Sovereign and the GAM Trading II fund invest in below:
Overseas investments
Both the Sovereign fund and the GAM Trading II fund can invest in overseas investments, so their values may be affected by changes in the exchange rate.
Overseas investments may also carry with them special risks because of the potential for political and economic instability, the effect of foreign taxes, and as a result of different regulatory systems. These issues could mean that the price of these investments may move up and down more, it may be harder to sell the assets, and it may be more difficult for the fund to get hold of its money when an asset is sold. Because of the wide array and nature of the assets the GAM Trading II fund invests in, the impact and likelihood of these special risks may be increased.
The costs relating to overseas investments also tend to be higher.
Fixed interest investments
Both the Sovereign fund and the GAM Trading II fund can invest in fixed interest investments. Their performance may therefore be affected by changes in interest rates:
- A fall in interest rates could mean that it is not possible to secure such a good rate on future fixed interest investments bought
- A rise (or the expectation of a rise) in interest rates may result in a decrease in the capital value of the fixed interest investments the fund currently holds.
If the issuer of a fixed interest investment goes bankrupt, they may fail to repay the capital and/or pay interest at all.
If the rating of a fixed interest investment changes, the capital value of the investment may fall and/or they may become harder to sell.
Again, because of the wide array and nature of the assets the GAM Trading II fund invests in, the impact and likelihood of these risks may be increased.
Leveraging risk
As well as investing money paid in by the investors, some funds borrow money from banks so that additional assets can be bought, a process called leveraging. If the fund's assets rise in value, the leveraging will increase the fund's returns, as the fund was able to hold more assets by borrowing money to buy them. However, if the fund's assets fall in value, leveraging will have the opposite effect, and will increase the effect of any loss. This can mean that small movements in price result in large increases or decreases in the value of the fund. This risk only applies to the GAM Trading II fund.
Counterparty risk (derivatives)
The GAM Trading II fund invests in funds that invest in derivatives, which are a type of investment whose value is based on the price of another specified investment. In other words, it 'derives' its price from another asset. An example of a derivative is a 'future'. This is a contract in which the buyer agrees to pay a set price for an asset, or to sell an asset for a set price, at a particular date in the future.
If the person or company selling the derivative (the counterparty) is unable or unwilling to fulfil the terms of that contract (e.g. if they promised to buy an asset from the fund for a set price, but then did not have the money to buy that asset) the fund could lose money.
The Sovereign fund does not invest directly in derivatives.
Liquidity risk
All assets carry some liquidity risk. This is a risk that should a fund decide to sell an asset it may take a long time to find a buyer, or it may not be possible to find a buyer at all. If this happens, this could negatively impact the value of the fund. Some of the assets the GAM Trading II fund invests in may not be bought and sold on a regulated market, and with this type of asset, liquidity risk is increased. The liquidity risk associated with the other assets held by the Sovereign fund is not considered to be material.
Questions?
If you have any questions about any of the above, please call us on 0844 8 920 920. All calls may be recorded and monitored for training purposes. Calls cost 13p plus 3p per minute from a BT landline (correct at 30/12/11). The cost of non-BT landline calls may differ.
* Fixed interest investments are bought for an amount of money that will be returned on a specific future date. The investor receives a fixed rate of interest during this time. The rate of interest paid cannot change, but it is not the same as putting your money in a fixed rate cash account. Fixed rate investments can be traded on the stock market so their value, up until the end of the fixed rate period, can rise and fall in a similar way to the price of stocks and shares.
** Money market instruments are short-term investments that provide a set return on maturity in exchange for investing funds for an agreed time period.
