Risk level
The risk level is based on an industry-wide Standard Risk Measure, which allows members to compare the number of expected negative annual returns over a 20-year period.
The Standard Risk Measure ranges across seven risk bands, from 1 (very low) to 7 (very high risk).
It’s not a complete assessment of all forms of investment risk. For instance, it doesn’t detail what the size of a negative return could be or the potential for a positive return to be less than a member may require so they meet their financial objectives. It also doesn't take into account the impact of administration fees and tax on the likelihood of a negative return.
Members should ensure that they are comfortable with the risks and potential losses associated with their chosen investment option or options.
Risk bands
| Risk band | Risk label | Estimated number of negative returns over any 20 year period |
|---|---|---|
| 1 | Very low | Less than 0.5 |
| 2 | Low | 0.5 to less than 1 |
| 3 | Low to medium | 1 to less than 2 |
| 4 | Medium | 2 to less than 3 |
| 5 | Medium to high | 3 to less than 4 |
| 6 | High | 4 to less than 6 |
| 7 | Very high | 6 or greater |
Our process for establishing the level of expected risk
We conduct an annual review of investment strategy. As part of this review, Frontier Advisors reviews the returns, risk and the likelihood of negative returns for each major asset class each year.
Frontier Advisors also reviews the relationships between asset classes and their returns (correlations).
A model is used which combines the return, risk, and correlation assumptions, together with our strategic asset allocation weights to determine expected total portfolio risk and return characteristics.
The likelihood of a negative return is calculated from the portfolio risk and return estimates.