Information on the Nature and Risks of Financial Instruments

(2008-09-08)

Risks
When entering an active management agreement, all customers will receive information regarding financial instruments and types of investment strategies and the risks associated with these financial instruments and investment strategies. Please refer to the separate memorandum on the company’s website.

This information is provided to you in accordance with the requirements of the European Communities (Markets in Financial Instruments) Regulations 2007 (the “Regulations”). This information provides a general description of the nature and risks of financial instruments taking account of your investor categorization under the Regulations. It does not disclose all the risks and characteristics of financial instruments that you may trade in, however it is designed to give you an understanding of the major risks and characteristics. In some circumstances the risks identified below may not apply to the particular financial instrument that you wish to invest in, either because of that financial instrument’s particular characteristics, your risk appetite in respect of that financial instrument and/or the purpose of your investment. You should not deal in financial instruments unless you are aware of the nature and risks of the transactions you are entering into. You should obtain a clear explanation of all commissions, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss. You should understand the extent of your exposure to any potential loss.

The value of financial instruments may fall as well as rise. When investing in financial instruments there is a risk that you may lose some or all of your original investment. You should consider whether investing in financial instruments is suitable for you in light of your individual circumstances and taking account of your investment objectives, financial position and attitude to risk. In deciding whether certain financial instruments are suitable investments the following information describing the nature and risks of such instruments should be carefully considered.

Shares (Equities)
Owning shares in a company provides an opportunity to share in a company’s profit and performance, in the form of dividends and capital growth. Individual shares and stock markets can be volatile, especially in the short-term. Some shares are likely to be more volatile than others. This will be based, amongst other things, on the business, geographic location and size of the company. Your ability to realize shares when you so wish is a critical factor (Liquidity). Shares in companies that are not traded on a stock exchange can be very difficult to sell. Many shares that are traded on Stock Exchanges are bought and sold infrequently and finding a buyer may not always be easy. The existing price of the stock is also an important determinant of volatility. Potential investors should be familiar with any company they plan to invest in. Share portfolios are at a greater risk of significant loss if there is a lack of diversity i.e. an overreliance on stocks in one particular company, industry sector or country.

Other than the cost of acquiring shares you will not be subject to any margin requirements or financial commitments/ liabilities. However, as the value of shares may fall as well as rise, there is a risk that you may lose some or all of your original investment.

Bonds
A bond is a debt instrument in which the issuer promises to pay to the bondholder principal and interest according to the terms and conditions of the particular bond. Although not to the same extent as shares, bonds can be subject to significant price movements. Bonds can also be subject to default and the non-payment of interest and/ or principal by the lender. As with shares some bonds are considered to be safer than others. In general, Government Bonds are considered to be subject to less risk than Corporate Bonds. This is simply because governments are less likely to default on their debt than companies, although this may not be the case with some emerging markets. Bond ratings give an indication of an issuer’s probability of defaulting, based on an analysis of the issuer’s financial standing and profit potential.

Corporate bonds are issued by companies but they are split into different types depending on the credit rating they achieve. Companies that have high ratings are known as investment grade bonds, while companies with low ratings are known as high yield bonds, because they have to promise higher income payouts to attract investors. Companies that do not achieve ratings are known as ‘junk’ bonds.

Companies also issue different types of bonds. Debenture stocks, for example, are secured against specific company assets, while unsecured loan stocks pay higher yields but are not secured against the company’s assets. Companies also issue convertible bonds that give holders the right to convert them into shares under certain circumstances.

Other than the cost of acquiring bonds, you will not be subject to any margin requirements or financial commitments/ liabilities. However, as the value of bonds may fall as well as rise, there is a risk that you may lose some or all of your original investment.

Exchange Traded Funds
Exchange Traded Funds (ETFs) are investment products that provide investors with an opportunity to invest in a diversified basket of shares through one investment instrument. An ETF will generally track the shares of companies that are included in a selected market index, investing in either all of the shares or a representative sample of the shares of the selected index.

The performance of an ETF is likely to be reflective of the performance of the index upon which the ETF is based. ETFs are more liquid than normal funds and can be traded in the same way as any normal share. Like shares, ETFs can be subject to volatility, especially in the short term. Some ETFs are likely to be more volatile than others. This will be based, amongst other things, on the nature and size of the underlying companies and the liquidity/ price of the underlying stocks.

Potential investors should be familiar with the nature of the underlying companies of any ETF they plan to invest in. Other than the cost of acquiring ETFs, you will not be subject to any margin requirements or financial commitments/ liabilities. However, as the value of ETFs may fall as well as rise, there is a risk that you may lose some or all of your original investment.

Exchange Traded Commodities
A commodity is a physical substance such as food, grains, oil, gas, and metals, which is interchangeable with another product of the same type that is traded primarily on the basis of price driven by supply and demand, and not on differences in quality or characteristics.

Historically, commodities have been quite complicated to trade, but in recent years, alternative and simpler means of investing in commodities have arrived. An exchange-traded commodity (ETC) is one such means for investors to invest in specific commodities or a general commodity index, such as cocoa or precious metals. ETCs work by investing in real commodities via future contracts and in doing so track a specific commodity or a general commodity index.

The performance of an ETC is likely to be reflective of the performance of the commodity or basket of commodities upon which the ETC is based. ETCs can be traded in the same way as any normal share but can be subject to significant volatility, both in the long term and the short term. Some ETCs are likely to be more volatile than others.

Potential investors should be familiar with the nature of the underlying commodity or commodities of any ETC they plan to invest in. Other than the cost of acquiring ETCs, you will not be subject to any margin requirements or financial commitments/ liabilities. However, as the value of ETCs may fall as well as rise, there is a risk that you may lose some or all of your original investment.

Money Market Instruments
The money market is a highly liquid professional dealer market that facilitates the transfer of funds (generally in very large denominations) between borrowers and lenders. It generally relates to those instruments that allow for borrowing and lending periods ranging from one day to one year.

Although money market instruments carry less risk than long-term debt they are not completely without risk. Different instruments carry varying degrees of risk depending on the nature of the lending agreement and the identity of the lender. Potential investors should be aware of such details prior to entering into any money market transactions.

Common money market instruments include: Exchequer Notes, Commercial Paper, Treasury Bills, Repurchase Agreements and Bankers’ Acceptances.

In general other than the cost of acquiring money market instruments, investors are not subject to any margin requirements or financial commitments/ liabilities. As the value of money market instruments may fall as well as rise, there is a risk that you may lose some or all of your original investment.

Unit Trusts
Unit trusts are a type of “pooled investment”. A pooled investment is one where a number of investors put different amounts of money into a fund, which is then invested in one or more asset classes by a Fund Manager. The price of the units in the fund is determined by the value of the assets the fund holds. Where the fund is an “open ended” fund the number of units, and not the value of those units, will rise or fall based on whether investors buy or sell units. As such, open-ended funds are generally very liquid.

Each unit trust fund has a stated investment strategy, enabling you to invest according to your investment objectives and risk profile. The level of risk will depend on the underlying investments, regulatory status of the fund, any investment restrictions that may apply, the extent to which the fund leverages its assets and how well diversified the open-ended investment fund is. The principle of leverage is to increase the fund’s exposure to underlying assets by means of borrowing or other means in the pursuit of higher returns from the amount invested. Leveraging may increase any losses suffered by a fund. Funds investing in emerging markets or smaller companies would be considered to carry much higher risk than those investing in large blue chip companies.

Potential investors should be familiar with the nature of the underlying securities in any unit trust they plan to invest in. Other than the cost of investing in unit trusts, you will not be subject to any margin requirements or financial commitments/ liabilities. However, as the value of a unit trust may fall as well as rise, there is a risk that you may lose some or all of your original investment.

Undertakings for Collective Investment in Transferable Securities (UCITS)
An Undertaking for Collective Investment in Transferable Securities is a specific type of collective investment that can be operated freely within the EU in accordance with the Undertakings for Collective Investment in Transferable Securities Directive. As with other collective investments, UCITS tend to invest in a range of individual securities, giving investors the opportunity to invest in a diversified product. However, UCITS are proscribed from investing in more complex and higher risk securities and are subject to rules which oblige them to reduce the risk of exposure to any particular issuer.

UCITS can be subject to volatility, especially in the short term. Some UCITS are likely to be more volatile than others. This will be based, among other things, on the nature and size of the underlying securities and the liquidity/ price of the underlying securities.

Potential investors should be familiar with the nature of the underlying securities in any UCIT they plan to invest in. Other than the cost of investing in UCITS, you will not be subject to any margin requirements or financial commitments/ liabilities. However, as the value of UCITS may fall as well as rise, there is a risk that you may lose some or all of your original investment.

Investment Companies
Investment Companies are a type of “pooled investment”. A pooled investment is one where a number of investors put different amounts of money into a fund, which is then invested in one or more asset classes by a Fund Manager. Unlike a unit trust, an investment company is a separate legal entity, which holds the assets and issues shares representing those assets. The price of the shares in the fund is determined by the value of the assets the fund holds. Where the fund is an “open ended” fund the number of shares, and not the value of those shares, will rise or fall based on whether investors buy or sell shares. As such, open-ended funds are generally liquid.

Each fund has a stated investment strategy enabling you to invest according to your investment objectives and risk profile. The level of risk will depend on the underlying investments, regulatory status of the fund, any investment restrictions that may apply, the extent to which the fund leverages its assets and how well diversified the open-ended investment fund is. The principle of leverage is to increase the fund’s exposure to underlying assets by means of borrowing or other means in the pursuit of higher returns from the amount invested. Leveraging may increase any losses suffered by a fund. Funds investing in emerging markets or smaller companies would be considered to carry much higher risk than those investing in large blue chip companies.

Potential investors should be familiar with the nature of the underlying securities in any investment company they plan to invest in. Other than the cost of investing in an investment company, you will not be subject to any margin requirements or financial commitments/ liabilities. However, as the value of a investment company may fall as well as rise, there is a risk that you may lose some or all of your original investment.

Limited Partnerships
Limited partnerships are a form of “pooled investment”. A pooled investment is one where a number of investors put different amounts of money into a fund, which is then invested in one or more asset classes by a Fund Manager. A limited partnership will generally consist of two types of partner: general partners who will control the partnership and who will have joint and several liabilities to the partnership; and limited partners whose involvement and liability is limited to their investment. Investors are limited partners. The price of the shares in the limited partnership is determined by the value of the assets the partnership holds.

Each limited partnership has a stated investment strategy enabling you to invest according to your investment objectives and risk profile. The level of risk will depend on the underlying investments, regulatory status of the fund, any investment restrictions that may apply, the extent to which the fund leverages its assets and how well diversified the limited partnership is. The principle of leverage is to increase the fund’s exposure to underlying assets by means of borrowing or other means in the pursuit of higher returns from the amount invested. Leveraging may increase any losses suffered by a limited partnership. Limited partnerships may not be UCITS. Funds investing in emerging markets or smaller companies would be considered to carry much higher risk than those investing in large blue chip companies.

Potential investors should be familiar with the nature of the underlying securities in any limited partnership they plan to invest in. Other than the cost of investing in an limited partnership, you will not be subject to any margin requirements or financial commitments/ liabilities. However, as the value of a limited partnership may fall as well as rise, there is a risk that you may lose some or all of your original investment.

Common Contractual Funds
Common contractual funds are a form of “pooled investment” which are specifically designed to be an attractive vehicle for the pooling of pension fund monies. A common contractual fund is an unincorporated body created by contract that is structured to be tax transparent, so as to be attractive to pension funds. A pooled investment is one where a number of investors put different amounts of money into a fund, which is then invested in one or more asset classes by a Fund Manager. The price of the shares in the fund is determined by the value of the assets the fund holds.

Each fund has a stated investment strategy enabling you to invest according to your investment objectives and risk profile. The level of risk will depend on the underlying investments, regulatory status of the fund, any investment restrictions that may apply, the extent to which the fund leverages its assets and how well diversified the common contractual fund is. The principle of leverage is to increase the fund’s exposure to underlying assets by means of borrowing or other means in the pursuit of higher returns from the amount invested. Leveraging may increase any losses suffered by a fund. Funds investing in emerging markets or smaller companies would be considered to carry much higher risk than those investing in large blue chip companies.

Potential investors should be familiar with the nature of the underlying securities in any common contractual fund they plan to invest in. Other than the cost of investing in an common contractual fund, you will not be subject to any margin requirements or financial commitments/ liabilities. However, as the value of a common contractual fund may fall as well as rise, there is a risk that you may lose some or all of your original investment.