27 March 2017
Over the past week Australian shares were 0.8% lower. Shares in developed countries fell 0.9% with the US market 1.4% lower. Shares in emerging markets were up 0.4%. The Australian dollar was 1.1% lower at 76.23 US cents. The 10 year bond yield in Australia was 0.11% lower at 2.75% while in the US, the 10 year bond yield closed 0.09% lower at 2.41%. The oil price lost 1.7% to 47.97 US dollars per barrel.
When looking at our product disclosure statements (PDS) you might come across a risk measure for our investment options called the Standard Risk Measure (SRM). The SRM is the estimated number of annual negative returns over any 20 year period. By law this measure of risk must be disclosed in our PDSs.
Nearly every risk measure provides some information but it’s rare that one single risk measure can convey all the risks of an investment. This is true for the SRM.
The biggest shortcoming of the SRM is that it doesn’t consider the size of the negative return. If two investments have the same expected number of yearly losses but the size of the possible losses are greater in one investment than the other, the SRM doesn’t identify this and will indicate the two investments have the same risk.
It’s important to think about risk from as many different perspectives as possible and not rely on any one measure. When we construct our portfolios we place very little emphasis on the SRM and instead focus on a large range of risk measures. We look at the impact of different risk factors and use our judgement and experience to challenge our risk models.