Risk disclosure statement

This risk disclosure statement describes certain risks identified by InvestEngine (UK) Limited (“InvestEngine”) in relation to investments generally and in relation to the services provided by InvestEngine. InvestEngine may amend this policy from time to time by updating this page. You should check this page from time to time to ensure that you are happy with any changes.

Investments are exposed to different kinds and degrees of risk. InvestEngine wants to help you understand the complex subject of investment risk and how we seek to manage this when you receive our discretionary investment management service.

The text below describes certain key risks associated (to differing extents in different circumstances and with varying predictability) with the investments (exchange-traded funds) used by InvestEngine, in relation to which we provide our services. The risks set out here are not exhaustive and other risks may be relevant or arise in the future.

If you are in any doubt about the risks involved in investing, the services we provide or whether to invest with InvestEngine, ask us or seek independent financial advice.

The value of your investments can go down as well as up

When investing, there is always the risk that your investment could fall in value as well as rise.

Leaving your savings with a bank or other deposit-taking institution as cash may seem a relatively ‘safe’ option, there is the risk that the real values of your savings are reduced by the effects of inflation. The interest rate you earn on your savings account must at least equal the prevailing rate of inflation, or you will lose money in real terms.

When investing in things that are not cash, there are no guarantees. Share prices fall as well as rise. Companies can run into financial difficulty. Even governments sometimes struggle to repay their loans. Property can also be subject to large fluctuations in value. Everyone looking to make an investment does so for the opportunity to make positive returns but in doing so, they must accept the possibility that they may end up with less money than they originally put in.

The potential returns from an investment are, to some degree, linked to the risk an individual investor is willing to accept. In general, the higher the risk, the higher the potential return you (as investor) could potentially receive, but this is not always the case.

Unfortunately, by taking on more risk in the hope of achieving a greater return, the chance of losing money increases as well. None of the investments provided by InvestEngine are risk-free, and you may therefore get back less than you initially invest. While our objective is to select investments with the potential to achieve the optimum level of return for your accepted level of risk, there can be no guarantees that the investment strategy will succeed.

The risks

You should be aware that the price and value of any investments, and the income (if any) from them, can fluctuate and may fall. You may get back less than the amount originally invested or even lose the full amount. Information on past performance, and forecasts where given, are not a reliable indicator of future results or performance.

Government policy, political events, social issues and public sentiments may have wide-reaching consequences for the value of investments.

Exchange rate and interest rate fluctuations may have an adverse effect on the value of investments. If the underlying holdings of your InvestEngine investments are in a currency which is different to the denominated currency of your InvestEngine account, you will face currency risk.

Liquidity risk arises when the value of an investment cannot be realised quickly because there are insufficient buyers in the market. For instance, in a falling market an investor may be unable to sell quickly without accepting a much reduced price or at all. This risk is most relevant to unlisted securities, but can also affect listed securities, particularly smaller companies and those which do not have high volumes of trading. InvestEngine only invests in ETFs trading on the London Stock Exchange. Liquidity risk should be lower for such investments than for, for example, investments in the shares of unlisted securities, though it cannot be excluded that particular events or circumstances could cause the ETF trading market to become illiquid.

Exchange-traded fund (ETF)

InvestEngine invests exclusively in exchange-traded funds (“ETFs”). ETFs are investment funds, traded like shares, which hold investment assets such as shares, commodities or bonds. ETFs normally closely track the performance of a financial index, and as such their value can go down as well as up (and you may get back less than you invested). Some ETFs rely on complex investment techniques, or hold riskier underlying assets to achieve their objectives.

Index risk

ETFs are designed to match an index, and are passive investments. Because an ETF is not actively managed, it will not sell a security if the security’s issuer is in financial trouble—unless the security is removed from the index. This means that the ETF will move up and down with the index and the ETF manager will not take defensive positions, or sell losing positions, in a market downturn. This also means that the manager won’t increase exposure to positions that it anticipates increasing in value, either. This lack of management means that investors are placing their money with an index, not a manager, and their fortunes are related to the performance of the index. The best way for an investor to deal with index risk is to understand what is in the index and the rules governing what goes into, or out of the index, as covered in the ETF’s documentation which we will provide to you on your request.

Tracking error

In addition to the risk of their investment being exposed to the movements of the index, investors also are at risk when the ETF does not match the performance of the index, a situation known as tracking error.

Tracking error represents the difference between the performance, or return, of the ETF’s portfolio and the underlying index. Tracking error occurs for a number of reasons. The first is that an ETF has expenses that an index does not have, because it incurs costs when it buys and sells securities. The frequency of these transactions, such as how often an ETF rebalances its portfolio, can increase the costs that increase tracking error and diminish an ETF’s performance.

Another reason for tracking error occurs when an ETF holds cash, which will earn a different rate of return than ETFs invested in the portfolio and cause a deviation in returns between the index and the ETF (at some times the cash may perform better than the ETF). With ETFs however, the amount of cash held tends to be small.

Certain ETFs may exhibit tracking error because the weights of the securities in their portfolios do not match those in the ETF. When the weights are based on market capitalisation, this will not be much of a problem, because the weights are tied to the capitalisation of the stocks, and if a stock moves up in price in the index, that will be captured in the ETF. The difficulty arises when an ETF assigns weights by another means, such as equal weighting or some arbitrary method of weighting. In these cases, changes in the values of the securities in the index may not show up in the ETF until it is rebalanced, where the ETF’s securities are adjusted to match those in the index. This lag can induce tracking error.

Another source of tracking error comes from the fact that many ETFs do not hold all the securities that make up the index. There are two ways for an ETF to track an index. The first is replication, whereby the ETF holds all the securities in an index in the same proportions as in the index. The second is by representative sampling, whereby the ETF uses a sampling methodology to select securities that it believes will provide the same performance as the entire portfolio. This methodology usually produces larger tracking errors than if the ETF bought the whole index. The amount varies depending on the quality of the sampling process.

Counterparty risk

ETFs do not always hold the physical assets. If the investment bank providing the future/option fails, the ETF will lose part or all of the money it has invested.

Tax

The tax treatment of an exchange-traded investment is subject to change, which could affect your investment in the future. In some cases, the returns from trading ETFs may potentially be subject to income tax rather than capital gains tax. The ongoing tax liabilities are determined by both your individual circumstances and the continued status of the exchange-traded investment. If you are unsure of your tax liabilities you should consult a qualified tax advisor.

Other risks

Other risks include, but are not limited to, the following:

Investors may not benefit from the same entitlements as if they held the shares directly (e.g. voting rights).

Investors cannot control the investments that are made within the ETF. This discretion is held by the investment manager appointed by the third-party investment ETF provider.

Although an ETF may be denominated in a particular currency, underlying investments may be held in other currencies and thus the ETF may be subject to currency moves. ETFs on overseas markets may involve different risks to the UK.

ETF prices can be volatile. The overall market may fall, or the ETFs that you invest in may perform badly. Underlying assets within ETFs may decline in value. The value of your investment may go down as well as up. Past performance is no indication of future performance. ETFs may be suspended from trading due to the closure of the underlying market or due to the winding down of the fund.

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