Types of investment risks

The level of market risk a fund is exposed to primarily depends on the asset classes it invests in. For example, equities, listed property and listed infrastructure assets are considered to be more risky than cash and cash equivalents and fixed interest assets.

However, there are times when some individual assets can be more negatively impacted by a specific market event than other assets. For instance, the value of assets in a particular region may fall more in response to a pandemic or a geopolitical event.

Impact

If a company we invest in performs poorly:

• For equities, listed property and listed infrastructure assets:
  -  Share or unit prices may drop below the purchase price or even to zero.
  -  Dividends may not be paid.
• For cash and cash equivalents and fixed interest assets, the issuer may not be able to pay interest or repay principal.
  

The above scenarios will have a negative impact on the value of the assets in a fund.

For fixed interest assets and also some cash and cash equivalents, the value of the assets in a fund will also fall if:

• Interest rates in the market increase.
  
• The creditworthiness of the issuer decreases.

How we mitigate

Our funds invest in assets in a wide range of industries, companies, issuers, and countries (for certain funds). In addition, our multi-asset class funds invest in multiple asset classes.

This means that poor performance by a single asset or asset class may have less impact on your investment and investment losses from one asset or asset class may be offset by investment gains from another. 

Impact

If you invest in a fund that is not appropriate for your investment timeframe and tolerance for risk, you may end up with less money than you expect or need when you withdraw. 

For example:

• Investing in a growth fund when you need to access your money in the short term. You risk having to withdraw when markets are down, and you could get less than you expected.
• Investing in a cash or conservative fund when you have a long-term investment timeframe. You risk missing out on longer-term growth potential.

How we mitigate

We offer a range of funds that invest in a different mix of income and growth assets. 

With the exception of the Cash Fund, we try to mitigate this risk further by varying the investment mix for each fund depending on how we believe each asset class is likely to perform. We call this tactical asset allocation. 

Impact

For fixed interest assets and cash and cash equivalents the value of the assets in a fund may fall if, for example:

• The issuer or entity is not able or not willing to pay interest or repay all the principal on their debt obligations.
• The credit worthiness of the issuer or entity is downgraded.

For derivatives, the value of the fund may fall if, for example, the other party to the derivatives contract does not meet its contractual obligations.

How we mitigate

We only buy assets that have credit ratings that are considered investment grade, and do not buy assets below this threshold. Issuers or entities that have investment grade ratings generally have a lower risk of default and are more likely to repay principal and interest. 

To evaluate credit ratings of the cash and cash equivalents and fixed interest assets that we invest in, we or our external fund managers undertake research on the issuer or entity, or rely on credit ratings assigned by independent ratings firms. 

Derivative counterparties must meet minimum credit ratings. 

Impact

For a fund with foreign currency exposure, if the New Zealand dollar increases in value against a given foreign currency, all else being equal, the New Zealand dollar value of the fund will fall.

How we mitigate

We hedge all foreign currency exposure for our international fixed interest assets, international listed property assets and international listed infrastructure assets. We hedge some international and Australian equity foreign currency exposure depending on our view of the relative strength or weakness of the New Zealand dollar. 

Impact

For fixed interest investments and some cash and cash equivalents, the market value of those assets will fall if interest rates in the market increase. 

Changes in interest rates may also indirectly affect the value of other assets. For example, the value of equities which pay high levels of dividends may be negatively impacted by rising interest rates.

How we mitigate

As active managers, we and our external fund managers, have the ability to vary our investment mix in order to manage the risk and consequences of changes in interest rates. 

Impact

An illiquid asset may impact the value of the fund. 

In stressed market conditions, liquidity risk may mean you can’t withdraw, transfer or switch your investment. 

Liquidity risk may be increased where we receive a large volume of withdrawals.

How we mitigate

In general, when we invest in each asset class, we take into consideration:

• The quality of the assets and issuers.
• The size of the issuer.
• The size of our investment as a proportion of the total market.
• How long it would take to sell the asset.

 

Impact

If we, or our external fund managers, choose investments that underperform, the value of the fund may fall.

How we mitigate

We employ investment professionals and have a process for appointing external fund managers that takes into account a number of quantitative and qualitative factors. 

Once an external fund manager is appointed we monitor their performance, strategy and investment processes on a regular basis. 

Impact

Investing in derivatives may result in:

• Losses if the counterparty to the derivatives contract fails to meet its contractual obligations.
• Losses because of changes in the value of the underlying assets, indices or rates.
• Multiplying the effect of any increase or decrease in the value of the underlying assets, indices, or rates.

How we mitigate

We take into account the financial strength of any counterparties to derivatives contracts. Derivative counterparties must meet minimum credit ratings. 

We also monitor our use of derivatives to make sure we’re using them in accordance with the statement of investment policy and objectives. 

We do not use derivatives to leverage the funds.

Impact

Poor performance of a single investment or group of investments may cause the value of the fund to fall. 

How we mitigate

Our multi-asset-class funds invest in a range of asset classes, with underlying investments spread across many countries, regions and industries. 

Our underlying single-asset-class funds specify maximum limits on individual holdings, and exposures to companies or other limits (e.g. credit ratings). This is done to reduce the risk (exposure) to any one investment.

Impact

Damage to underlying assets from climate change events may cause the value of the investment to go down. 

Changes in market sentiment or increased regulatory costs may cause an issuers’ assets to be unusable or to be prohibitively expensive to use. This could reduce the cash flows of an investment and cause the value to go down.

How we mitigate

We integrate climate change considerations as part of our investment process. We, or our external fund managers, may take into account the risks and opportunities of climate change when evaluating an investment. For example, we have excluded those issuers which derive more than 10% of their revenues from thermal coal or unconventional oil and gas as we believe that those issuers have a high exposure to the risk of climate change.

Impact

An operational failure could result in us being unable to manage the assets of the fund effectively, which may negatively impact the performance of a fund.

How we mitigate

We have internal controls and procedures to mitigate the risk of operational failures. 

Impact

A legislative or regulatory change may affect the returns and benefits that you receive. For example, a change to the age at which New Zealand Superannuation is paid may affect when you can withdraw from KiwiSaver. 

How we mitigate

We regularly liaise with our regulators, and are consulted on certain legislative changes.