Risk Management

Any investment carries with it an element of risk from equity investments, fixed term deposits, and direct investments in share market and stocks. The Fund is a unit trust fund and is exposed to a variety of risks by nature of the investment schemes it is engaged in.

Market Related Investment

Since the Fund participates in equity related investments, the following risks become key considerations:

1. Market Risks:

The purchase of equities represents a risk since the prices of shares and stocks underlying the NAV of the fund fluctuate in response to many factors. Therefore, share or stock values fluctuate in response to the activities of individual companies, and general market or economic conditions. Such movements in the underlying values of the shares of the investment portfolio will cause the NAV or prices of units to fall as well as rise, and income produced by the fund may also fluctuate.

2. Particular Stock Risk:

Any major price fluctuations of a particular stock invested by the fund may affect the NAV and thus impact (adversely favourably) on the prices of units. This impact can, however, be minimized through the process of portfolio diversification where the Fund has equity holdings in various blue chip companies in Papua New Guinea.

3. Liquidity Risk:

Liquidity risk is defined as the ease with which a security can be sold at or near its fair value depending on the volume traded on the market. If a unit trust fund has a large portfolio or securities that are less liquid or difficult to sell, the securities may be sold at a discount to its fair value, hence affecting the value of the unit trust fund. This risk is minimized through the process of stock selection and portfolio diversification by the fund manager.

Investment in Bonds

Further, investment in bonds brings forth the following specific investment risks:

1. Interest Rate Risk:

Generally, bond (fund) prices move in the opposite direction of interest rates. If interest rates rise and bond (and bond fund) prices fall, this will lower the value of our investment. The interest rate here refers to the general interest rate of the country which may affect the value of investment even if the fund does not invest in interest-bearing instruments.

2. Interest Rate Risk:

Credit risk refers to an issuer’s ability to make timely payments of interest and principal. In the event that the issuer of the instrument is faced with financial difficulties, leading to a decrease in their credit worthiness and default in the payment of interest and principal, the value of unit trust fund may be adversely affected.

Other Risks

In addition to the above, investors of unit trust funds need also to consider the following:

1. Manager’s Risk:

There is the risk that the Manager may not adhere to the investment mandate of the respective fund. Poor management of the fund will jeopardise the investment of unit holders through the loss of their capital invested in the scheme.

2. Loan Financing Risk:

It is considered not advisable for unit holders to finance the purchase of fund units through borrowings. The price/value of units will fluctuate with the underlying fund portfolio and unit holders may find themselves faced with the scenario of being forced to provide additional funds to top up on their loan margins when the market goes down, or suffer the higher cost of financing when interest rates trend upwards; both these events increase the potential for capital loss. In addition, the returns on unit trusts are not guaranteed and may not be earned evenly over time.

3. Risk of Non-Compliance:

There is the risk that the Manager and others associated with the fund will not comply with the deed of the fund, the law that governs the fund, or the internal policies, procedures and controls. Non-compliance of the deed, the law, or the internal policies, procedures and controls may affect the investment of unit holders.

4. Currency Risk:

Where a percentage of the value of a fund is invested in foreign currency or assets denominated in foreign currency, the fund may be exposed to currency fluctuation risks. Fluctuations in foreign exchange rates will affect the value of the fund’s foreign investments upon conversion to local currency and subsequently impact the value of the unit holders’ investments.

5. Country Risk:

Overseas investments of the fund may be affected by changes in the political and economic conditions of the country in which the investments are made. Such political and economic factors may influence the growth and development of business enterprises and impact the stock prices of listed companies. PBADBF will be affected by changes in the political and economic conditions of Australia and New Zealand.

Home Grown Investments