Risk

Stefnir operates numerous UCITS and investment funds. The management of funds is governed by Act No. 128/2011, which implements European Union directives on undertakings for collective investment in transferable securities (UCITS). Stefnir also offers a range of institutional investment funds which are not available to the general public.

UCITS and investment funds are licensed forms of fund for collective investments. Management companies are required to establish rules for funds which must be confirmed by the Financial Supervisory Authority (FME) before the funds can commence operations. Supervision of these funds is comprehensive and highly active, both in terms of the management company’s own supervisory procedures and official supervision by the FME. For further information on types of funds please see FAQ

All UCITS and investment funds are run as investment departments within the management company and are therefore not independent legal entities. Stefnir hf. represents the funds and manages their interests with the authorization of unit holders.

All trading with financial instruments, including unit shares in the fund, represents a risk. Returns on the fund’s unit shares can fluctuate significantly. The value of unit shares can decrease and investors may lose part or all of their investment.

Categorizing risk

Stefnir hf. has divided its funds into seven different categories depending on the standard deviation in weekly returns over the past 5 years. Category 1 is the least volatile, while category 7 is the most volatile. A fund can be moved into a different category if the volatility of the underlying financial instruments changes. The categorization is based on guidelines issued by the European Securities and Markets Authority (ESMA, formerly CESR) on the calculation of the categories. For further information see SRRI

Risk associated with financial instruments

Many factors can cause a decrease in the price of financial instruments in which the fund has invested, including the price of unit shares in the fund. These factors include unforeseen events and the general economic conditions. New or amended legislation can also affect the price of unit shares, e.g. changes to tax laws or on resource fees in the fisheries. There is also liquidity risk, i.e. the risk of not being able to sell the securities when wanted. This risk can materialize in two ways, either by the market not being able to cope with the volume intended for sale due to a lack of buyers, or a significant bid/offer spread may form which means the desired results are not achieved when the securities are sold. In general the more diversified the share portfolio, the smaller the risk involved.

Using derivatives

Some funds are authorized to invest in derivatives in accordance with the conditions specified in Act No. 128/2011, particularly sub-paragraphs 5 and 6 of Article 30 and Article 34 of the Act. Trading with derivatives might reduce the risk associated with the fund, e.g. re-investment and interest rate risk.

The fund’s derivatives can be in the form of forward contracts. In the case of forward contracts, the fund undertakes to trade in financial instruments at a pre-determined price and time in the future. Future transactions of this nature create an obligation in the fund. The value of the forward contract fluctuates alongside changes in the price of underlying assets, thus affecting the intrinsic value of the fund.

Other risks related to investments in the fund

1. Market risk refers to the impact that possible changes in the price of financial instruments can have on the price of the fund. Financial instruments fluctuate in price and their value may both rise and fall, resulting in market risk for fund members.

2. Counterparty credit risk. Because the fund will buy from and sell financial instruments to third parties there is a risk that the buyer will not pay for the sold instruments or that the seller fails to deliver the instruments purchased by the fund.

3. Depositary and accounting risks. The management company of the fund entrusts a depositary company with the safekeeping of all the fund’s financial instruments. There is a risk is that these instruments can be lost through the bankruptcy of the depositary, malpractice, misuse or fraud on the part of the depositary. There is also a risk of errors during settlement.

4. Performance risk. The objective of the fund is to outperform predefined benchmark indexes. Because the management of the fund is a dynamic process, the fund may perform better or worse than the aforementioned benchmark and this therefore represents a performance risk.

5. Principal risk. The price of financial instruments may fluctuate and therefore the principal may decrease in the short or long term, due to fluctuations in the financial instruments in which the fund is investing at any given time.

6. External circumstances such as war, terrorism and political instability or related factors can affect the performance of financial instruments and are therefore considered a risk factor for fund members.

General disclaimer

UCITS are governed by different rules to investment funds under Act No. 128/2011, e.g. with respect to investment limits and the duty to effect redemption. The investment limits of UCITS are more restricted under Icelandic law. An investment fund is generally considered to represent a higher risk investment than a UCITS. The greater risk associated with investment funds is a result of its broader investment limits which could result in less risk distribution than in a UCITS. Please note that investing in unit shares of UCITS and investment funds generally involves a certain amount of risk. Investments can fall in value or lose all of their value. Previous returns from investment funds are no indication of future returns on investments.

Further information on the above can be obtained in the fund’s prospectus or key information sheet.

The management company of the funds is Stefnir hf, an independent subsidiary of Arion Bank which is licensed as a UCITS management company.