Trinidad and Tobago Unit Trust Corporation
Notes
to the Consolidated
Financial Statements
FOR THE YEAR ENDED
31 DECEMBER, 2012
Expressed in
Trinidad and Tobago dollars
A31
Strategy in using financial instruments
Financial risks arise from the acquisition of various classes of
financial instruments including equity and debt instruments
(traded and non-traded). With regard to its Collective Investment
Scheme business, the Corporation’s practice is to acquire financial
assets that provide consistent risk-adjusted returns relative to
specific investment objectives of the individual portfolios. In
general, the investment activities of the Funds involve taking long
positions in securities with a focus on medium term performance
as opposed to short-term gains-taking. The Collective Investment
Schemes neither use leverage nor sell securities short and have no
financial liabilities arising out of their investment activities.
In respect of its Treasury function, the Corporation’s strategy focuses
on cash management while earning intermediation income
via the interest spread of its financial assets over its associated
funding instruments.
Equity price risk
Collective Investment Schemes –
Registered locally as unit trusts
The Growth and Income Fund and the Universal Retirement Fund
may acquire equity instruments that are exposed to fluctuations
in market value. These exposures create equity price risk for the
portfolios and may contribute to substantial volatility in the value
of their net assets. This risk is managed via careful asset allocation
and security selection within specified limits.
Key influences on the asset allocation decision include domestic as
well as global economic and financial market trends. In the case
of equity, the security selection decision is typically influenced by
consideration of fundamental and technical valuation factors as well
as by the instrument’s historical price sensitivity to the stock market,
otherwise known as its beta. The amount of a particular security
eventually acquired takes into account the need to maintain
appropriate levels of diversification at the overall portfolio level.
The equity price risk exposure of the portfolios is monitored and
measured via categorization of the stocks by their beta. Stocks that
have a beta close of 1 would change by approximately 1% for every
1% move in the overall stock market.
By contrast, a stock with a beta of 0.5 would change by
approximately 0.5% for every 1% change in the market while a
stock with a beta of 1.5 would change by approximately 1.5% for
every 1% change in the market. A stock with a beta below 0.9
is considered to have low equity price risk relative to the overall
market whereas a stock with a beta above 1.1 is considered to have
high equity price risk relative to the overall market. A stock with
a beta between 0.9 and 1.1 is regarded as having equity price risk
comparable to the overall market.
The categorization of the portfolios’ equity holdings is provided
29) FINANCIAL RISK MANAGEMENT
(continued)
Unit Trust Corporation
Annual Report 2012
