How to quantify risk

Investment risk can be complicated. But most investors see it ultimately as the possibility of losing money.

Risk hides in different places… in politics, economics and elsewhere. On our website, you can find numerous references to currency risk, smaller companies risk and emerging markets risk. The list goes on. Many different characteristics and external forces can affect the ability of an investable asset (such as a company share or a bond) to provide a positive result for investors.

The ups and downs of investing

Most people understand, however, that accepting a higher level of risk can increase the potential for higher rewards, or returns, from an investment. This is where volatility comes in – or the upward and downward movements in the price of an asset, such as a company share or a bond. In general, if these movements are more pronounced, with a greater distance between peak and trough, the volatility is higher.

Investors look at different measures of volatility to evaluate levels of risk. You may even hear a fund manager talking about ‘risks to the upside’. Surely it should not be called a risk if it causes something to go up in value? It all points back to the idea of a greater potential return if an investor is prepared to tolerate a higher level of risk.

From one to seven...

European Commission regulations require fund managers to publish ‘Synthetic Risk and Reward Indicator’ (SRRI) numbers for their funds. The calculation is based on the volatility of returns by each fund over the previous five years. (Actually, each unit or share class of each fund is assigned its own SRRI, but to go into that now would just complicate things). From this calculation, funds are assigned SRRI numbers on a scale from one to seven. Those which have demonstrated the lowest volatility have a score of one. 

Like most measures of a fund’s behaviour, the SRRI only looks backwards. But in doing so it is trying to give investors an idea of the approximate level of risk and return they might see in the future. The SRRI is a prominent component of a Key Investor Information Document (KIID), which investors are required to read before making an investment.

Here’s an example of an SRRI you might see on a KIID:

Example of an SRRI

SRRIs change from time to time...

Because it is based on historical data, an SRRI cannot reflect all risks a fund might encounter. The fallout from Coronavirus contributed to higher levels of volatility in the prices of the assets our funds invest in. In turn, the SRRI for a number of Artemis’ funds increased in the middle of 2020. This was largely a reflection of higher volatility in markets generally and not necessarily caused by changes to the way the funds are managed.

In line with regulations, we continually monitor the volatility of our funds and we update their KIIDs when the SRRI numbers change.

Monitoring your investments

Investors can use a KIID to help assess whether a product remains appropriate for the risk they wish to take. Additionally, our website contains other types of information to help investors monitor our funds, including performance data and commentaries from the managers.

If you are not sure whether a particular fund is suitable for you, you may wish to seek financial advice. An adviser can also help assess how much risk might be required to achieve your financial goals based on your circumstances. You can find an adviser by visiting unbiased.co.uk (opens in a new window).

Current SRRIs

Where you can find the current SRRIs for each fund and unit/share class: