[ INGENIOUS ASSET MANAGEMENT]

Risk control

We define ‘investment risk’ as ‘the chance of losing money’. There are several threats to the erosion of investors' capital and these are the risk factors we focus on. The main ones are:

i) Price volatility

Some asset prices swing around on a daily basis. Some see dramatic changes in their price over an extended period. These changes reflect the normal workings of a market. On occasion, price movements may reduce the value of the asset to below the price paid for it, thus creating a paper loss. This volatility in asset prices and the value of a portfolio in its entirety is modelled and managed using our proprietary risk model, Efficient Frontier^ө|.

ii) Liquidity risk

Certain assets are highly illiquid and we tend to avoid them, typically only purchasing them with the prior agreement of the client. Others may have no liquidity ahead of a fixed maturity date, such as capital guaranteed structured notes, whose guarantee applies only at maturity. In these cases, we negotiate a degree of secondary market liquidity ahead of maturity. If we are not satisfied, we do not invest.

iii) Mispricing

Prior to making an investment, we ensure we fully understand how it is priced. If the methodology is not appropriate in our view, or the process is too opaque, we will not invest.

iv) Fraud

Although thankfully fraud is very rare, it does happen on occasion. We seek to minimise the risk of fraud by restricting ourselves to working and investing with mainstream reputable managers. Our thorough due diligence process always includes a face-to-face meeting with the manager. Ultimately, however, we also have to rely on our experience and judgment to avoid fraudulent operators.

v) Counterparty risk

We tend to restrict our counterparty exposure to those with the highest credit ratings available. For example, we generally limit bond exposure to government or supra-national bonds, which are AAA-rated.

When investing in corporate bonds, we restrict this to investment grade only. Our preference is to invest in corporate bond funds where the counterparty risk is spread widely across a large portfolio of names. For larger clients, we may invest directly in corporate bonds. This would only happen if we could achieve a sufficient spread of bonds and the bonds were single ‘A’ or better. We would only make these investments with the prior agreement of the client.

For structured notes we would require the counterparty to be at least ‘AA’ rated. If not, we would require gilt backing (‘AAA’) for the note.

vi) Manager Risk

There is, of course, a risk that fund managers under-perform, whatever their track record.

Our exacting due diligence process, which must be completed prior to investing in a fund, is designed to reduce this. It consists of the following elements:

i) The manager of the fund is required to provide a wide range of information about the fund and its management company (e.g. fund size, pricing, performance, investment objectives, process, management experience).

ii) Qualitative analysis. The primary source of information for this is face-to-face meetings with the manager. We will not invest in a fund without having met the manager first. In particular, we want to explore his or her attitude to risk and wealth preservation, as well as the culture of the firm and its investment process.

iii) Quantitative analysis. Our investment managers, supported by our Head of Risk Management, analyse the facts relating to historical trends in performance and risk.

iv) Finally, before inclusion in models or client portfolios, research carried out by individual analysts, focusing on the people, processes, philosophy and performance of a particular fund, is reviewed by our other investment directors.

Ultimately, we cannot eliminate risk, nor do we claim to do so. We seek to identify and eliminate unintended risks and to ensure that the risks that are taken are recognised, both in their nature and their magnitude.