At iPRO Investment Professionals, we believe that financial risk management is just as important as stock selection. The investment style we practice – buy growth at a reasonable price or below its intrinsic value – offers investors a good underlying safety margin.
In addition, our rule is to invest only in companies that have:
- significant tangible assets
- strong cash flow
- or large amounts of cash
Which adds protection additional against declines.
As investment advisers, we must have put in place a series of work and control protocols. It is very important to us that our customers are fully informed transparency of our working methods.
Good financial risk management requires discipline
1) Strict sales criteria
We use clearly defined sales criteria to achieve profits and thus maintain our portfolio risk profile.
On the upside, we usually sell a position when it hits our valuation target.
Conversely, a position is usually sold in the event of a major disappointment. Or a significant deterioration in any key performance metric. Especially if it is confirmed both by an analysis fundamental and technical.
An investment position can also be sold or reduced if an opportunity more interesting is identified for example.
2) Regular checks
The iPRO Investment Professionals Group Local Investment Committee meets once a month. This for the purpose to approve all asset allocation changes iPRO Growth Fund (IGF) that we offer to the general public.
In addition and as part of our financial risk management process, company news such as dividend declarations, earnings publications, or company announcements are immediately analyzed by analysts.
Investment committees specials are put in place if the model needs to be changed urgently.
The framework: local bonds and cash
1) The landscape of the asset class in Mauritius
The local bond market is still in its very early stages of development.
The financial universe offered to investors consists of government bonds, ranging from short-term treasury bills to medium and long-term bonds. In addition, there is a wide range of term deposits from commercial banks and leasing companies.
2) Our logic of financial risk management
We use a direct investment route.
Given the rather illiquid local bond market on the long end of the yield curve, in particular, our strategy would be to buy and hold rather than trade.
We, therefore, distribute bond holdings over the entire range of maturities. And subsequent weightings will focus on the relative attractiveness of the returns offered.
To help us in our decision, we always use our internal models for forecasting inflation and interest rates. Using this data, we are able to recalibrate the bond part in the overall portfolio as needed. This mainly in order to be able to generate the maximum possible yield.
3) Our current strategy
Our current investment strategy on the local bond market would consist of spreading the allocation only in the short to medium-term spectrum.
The main reason for this exercise is to allow us to reallocate the bond portion in the future to more attractive expected returns.
This in turn is based on our expectation that the excess liquidity situation will ease when more attractive returns are achieved. Which in turn would allow us to lock in longer-term bonds.
4) Our strategic and tactical decision-making processes
All strategic and tactical investment decisions are taken by the Investment Committee through periodic meetings. These meetings are held separately for local and foreign investments.
We favor the diversity of skills and ideas available to discuss and reach a conclusion in each of these committees. In this way, there is a good mix of research, analysis, technical experience, and financial risk management.
Our financial risk management framework
We have set up a framework model for risk management and internal control for the iPRO Growth Fund, called the Framework.
This Framework was designed to facilitate identification, evaluation, and attenuation of the inherent business risks to which the fund is exposed. While providing reasonable assurances concerning:
- compliance with regulatory obligations
- reliability of information
- and safeguarding of assets under management
The Framework is not intended to completely eliminate these risks. But it can be seen as protection adequate against material misstatements or losses that may result from adverse events.
Our financial risk management control bodies
The supervision of financial risk management and internal control activities, whether at the level of the IGF fund, or of its service providers, is delegated to the Audit Committee.
This regularly examines the efficiency and robustness of the Framework through management letters provided by the external auditor.
In addition, the Audit Committee receives:
- quarterly compliance reports
- regular reports on money laundering
These reports are provided by the Money Laundering Reporting Officer and the Fund Compliance Officer respectively.
The Investment Committee, to a certain extent, also monitors the controllability of the risks associated with the investment decisions made by the fund manager to ensure that they comply with the risk appetite and tolerance of the fund manager. IGF.
The Framework finally recognizes that the fund depends on its service providers for its proper functioning.
This means that the ownership of the main risk areas, as soon as they are identified, is assigned to the relevant service provider for reporting purposes to the Audit Committee or the Investment Committee, as the case may be.
In practice, what does financial risk management cover?
The main risks to which the fund is exposed and the various measures envisaged to manage them are as follows:
1) Market/price risk
Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as
- interest rates,
- exchange rates,
- and stock prices.
The fund’s exposure to price risk relates to fluctuations in the price of the equity securities it holds. To manage this risk, IGF diversifies its portfolio in accordance with the limits set in its prospectus.
2) Currency risk
The fund’s operations are carried out on an international level. As such, they are therefore subject to the foreign exchange risk resulting from various foreign exchange exposures. (mainly in USD and EUR)
Currency risk is monitored by the investment manager and taken into account in the portfolio construction process.
3) Liquidity risk
The risk would be that the fund would encounter difficulty in meeting its obligations relating to financial liabilities. Liabilities are settled by delivering cash or another financial asset.
Exposure to liquidity risk arises from the possibility that the fund will be required to pay its commitments without delay. Or to buy back its shares earlier than planned.
In practice, the fund is exposed to cash redemptions of its redeemable shares on a weekly basis. The shares are redeemable according to the trading cycles of the different share classes.
Managing liquidity risk for the fund, therefore, consists of:
- maintain a capacity overall liquidate positions in the market given the illiquid nature of certain investments
- maintain cash balance levels enough
4) Country risk, still important in financial risk management
A significant portion of the fund’s portfolio is concentrated in the United States and Africa. As well as in Mauritius, where investments are held in entities operating in various sectors of the economy of these countries.
Therefore, the IGF remains exposed to UX economic trends prevalent in these sectors. These conditions have a direct impact on the share price of the companies held. And ultimately, on the fund’s share price.
5) The concentration risk
The fund may under certain circumstances concentrate the majority of its investments in certain companies, instead of spreading them over a larger number of entities.
One such circumstance today concerns the fund’s investment in iPRO Funds Ltd.
On January 21, 2013, the FSC approved the fund’s request to deviate from Regulation 65 (a) of the Securities (Collective Investment Schemes and Closed-Ended Funds) Regulations 2008 (“CIS Regulations”) so that the value of the investment in the securities is ‘an issuer does not exceed 25% provided that the Fund’s offering document complies with the requirements of Regulation 67 of the SIC Regulation.
The Board took note of the inherent concentration risk. And then agreed to gradually divest to reduce the risk of concentration in iPRO Funds Ltd. He now strives to diversify his investment portfolio to reduce concentration risk.
The Fund Manager monitors and manages concentration risk in relation to the fund portfolio. And the necessary measures are taken in the event of a discrepancy with the fund’s prospectus or with the applicable regulations,.
6) The compliance risk
The fund must comply with several legal and regulatory requirements due to the nature of its activity. Indeed, it could be subject to sanctions by its regulators in the event of non-compliance.
This risk is mitigated by compliance reviews quarterly, the conclusions of which are communicated to the Audit Committee.
7) Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows. Or the fair value of financial instruments.
The fund’s operating income and cash flow depend to some extent on changes in interest rates. The fund’s interest-bearing assets consist of cash held at the bank.
8) Credit risk
Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss to the fund by not fulfilling an obligation.
The fund is exposed to the risk of credit losses. These losses may arise because a counterparty or an issuer is unable or unwilling to honor its contractual obligations.
These credit risk exposures exist in funding relationships, derivatives, and other transactions.
9) Whistleblower policy
The fund depends on its service providers. The latter provided written confirmations confirming that they did have whistleblower policies in place.
In summary, we take financial risk management particularly seriously at iPRO Investment Professionals. And this is what allows us to offer you the peace of mind of investing in the long term in the iPRO Growth Fund.