Regulatory

This risk information applies to Gerd Kommer ETF (“GKE”). The risk information for Gerd Kommer Capital (“GKC”) can be found here.

The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Past performance is not an indicator of future performance. It should be noted that diversification does not guarantee against a loss in a falling market. The information above does not constitute a recommendation to buy or sell any securities.

The information contained herein is for informational purposes only and does not constitute investment advice, brokerage services or a recommendation to buy or sell a security. The above information is of a general nature and does not take into account the individual circumstances of the investor. All views expressed reflect the opinion of Gerd Kommer at the time of publication. The information is not intended for distribution to any person located in a country where such distribution would be contrary to local laws or regulations.

• This product does not provide protection against future market trends, so you could lose some or all of your investment.
• Be aware of currency risk. You can receive payments in a different currency, so the final return you receive will depend on the exchange rate between the two currencies.
• The fund is not covered by an investor compensation scheme.
• The value of the Fund may be affected by risks not included in the SRIs, including the failure of a counterparty, custodian, issuer or index provider and the use of derivatives.

A summary of the investor rights associated with an investment in the Fund is available in English at: https://fundcentres.lgim.com/en/de/private-investors/fund-centre/ETF/Gerd-Kommer-Multifactor-Equity/

The risks associated with each fund or investment strategy are set out in the key investor information document and the prospectus or investment management agreement (as applicable). These documents should be reviewed before making an investment decision. A copy of the English version of the Prospectus and Key Investor Information Documents for each Fund is available below https://fundcentres.lgim.com/en/de/private-investors/fund-centre/ETF/Gerd-Kommer-Multifactor-Equity/ available and can also be requested from your account manager.

It may be decided at any time to terminate the agreements made for the distribution of the Fund in an EEA Member State in which it is currently distributed. In such a case, shareholders in the EEA Member State concerned will be notified of this decision and will be given the opportunity to redeem their shares in the Fund without any fees or deductions for at least 30 working days from the date of such notification. If required by national regulations, the key investor information document will also be made available in the national language of the EEA Member State concerned.

Information on the sustainability aspects of the funds can be found at: https://fundcentres.lgim.com/en/de/private-investors/fund-centre/ETF/Gerd-Kommer-Multifactor-Equity/

The decision to invest in the Funds should take into account any features or objectives of the Fund as set out in its prospectus and in the key investor information document relating to the Fund.

This risk information applies to Gerd Kommer ETF (“GKE”). The risk information for Gerd Kommer Capital (“GKC”) can be found here.

The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Past performance is not an indicator of future performance. It should be noted that diversification does not guarantee against a loss in a falling market. The information above does not constitute a recommendation to buy or sell any securities.

The information contained herein is for informational purposes only and does not constitute investment advice, brokerage services or a recommendation to buy or sell a security. The above information is of a general nature and does not take into account the individual circumstances of the investor. All views expressed reflect the opinion of Gerd Kommer at the time of publication. The information is not intended for distribution to any person located in a country where such distribution would be contrary to local laws or regulations.

• This product does not provide protection against future market trends, so you could lose some or all of your investment.
• Be aware of currency risk. You can receive payments in a different currency, so the final return you receive will depend on the exchange rate between the two currencies.
• The fund is not covered by an investor compensation scheme.
• The value of the Fund may be affected by risks not included in the SRIs, including the failure of a counterparty, custodian, issuer or index provider and the use of derivatives.

A summary of the investor rights associated with an investment in the Fund is available in English at: https://fundcentres.lgim.com/en/de/private-investors/fund-centre/ETF/Gerd-Kommer-Multifactor-Equity/

The risks associated with each fund or investment strategy are set out in the key investor information document and the prospectus or investment management agreement (as applicable). These documents should be reviewed before making an investment decision. A copy of the English version of the Prospectus and Key Investor Information Documents for each Fund is available below https://fundcentres.lgim.com/en/de/private-investors/fund-centre/ETF/Gerd-Kommer-Multifactor-Equity/ available and can also be requested from your account manager.

It may be decided at any time to terminate the agreements made for the distribution of the Fund in an EEA Member State in which it is currently distributed. In such a case, shareholders in the EEA Member State concerned will be notified of this decision and will be given the opportunity to redeem their shares in the Fund without any fees or deductions for at least 30 working days from the date of such notification. If required by national regulations, the key investor information document will also be made available in the national language of the EEA Member State concerned.

Information on the sustainability aspects of the funds can be found at: https://fundcentres.lgim.com/en/de/private-investors/fund-centre/ETF/Gerd-Kommer-Multifactor-Equity/

The decision to invest in the Funds should take into account any features or objectives of the Fund as set out in its prospectus and in the key investor information document relating to the Fund.

This risk information applies to Gerd Kommer Capital (“GKC”). The risk information for Gerd Kommer ETF (“GKE”) can be found here here.

1. Gerd Kommer Capital

The information contained herein is for informational purposes only and does not constitute investment advice, brokerage services or a recommendation to buy or sell a security. The above information is of a general nature and does not take into account the individual circumstances of the investor. All views expressed reflect the opinion of Gerd Kommer at the time of publication. The information is not intended for distribution to any person located in a country where such distribution would be contrary to local laws or regulations.

2. Introduction

An investment is the use of financial resources to increase assets through income. In this case it is about investing capital in the capital markets by investing in securities.

Risks are part of every investment. Before making an investment, it is essential to develop a basic understanding of the risks of investments, investment products and investment services. The statements in this document are intended to provide the customer with such an understanding.

2.1 Objective

The goal of investing is to maintain or increase assets. The main difference between investments in capital markets and classic forms of savings such as savings accounts, current account or fixed-term deposit accounts is the targeted taking of risks in order to take advantage of return opportunities. With classic forms of savings, however, the amount paid in (nominal) is guaranteed, but the return is limited to the agreed interest rate.

Classic savings is one of the most popular forms of capital investment in Germany. The assets are mainly built up in nominal terms, i.e. through regular deposits and interest income. The amount saved is not subject to fluctuations. However, this supposed security may only exist in the short or medium term. Assets can be gradually devalued through inflation. If the savings interest rate is lower than inflation, the investor has to accept a loss of purchasing power and thus financial loss. The longer the investment period, the greater the negative impact of inflation on assets.

Investing in the capital markets is intended to protect against this gradual loss of wealth by achieving a return that is above inflation. However, the investor must be prepared to bear the risks of the various asset classes.

2.2 Interplay between returns, security and liquidity

When selecting a capital investment strategy and the corresponding investment instruments, it is important to be aware of the importance of the three fundamental pillars of capital investment, namely returns, security and liquidity:

* Return is the measure of the economic success of a capital investment, which is measured in profits or losses. These include, among other things, positive price developments and distributions such as dividends or interest payments.

* Security is aimed at preserving the invested assets. The security of an investment depends on the risks to which it is subject.

* Liquidity describes the availability of the invested assets, i.e. in what period and at what costs the invested assets can be sold.

The goals of return, security and liquidity interact with each other. An investment with high liquidity and high security usually does not offer high profitability. An investment with high profitability and relatively high security is usually not liquid. An investment with high profitability and high liquidity usually has low security.

An investor must weigh these goals based on their individual preferences, financial and personal circumstances. When making this assessment, investors should be aware that an investment that offers the prospect of achieving all three goals is usually “too good to be true”.

2.3 Risk diversification

When investing, it is particularly important not only to know and take into account the risks of individual investments or asset classes, but also to understand the interaction of the various individual risks in the portfolio context.

Taking into account the desired return, the portfolio risk should be optimally reduced through a suitable combination of investment instruments. This principle, i.e. the reduction of investor risk through an appropriate portfolio composition, is referred to as risk spreading or diversification. The principle of diversification follows the principle of not putting “all your eggs in one basket”. If you spread your capital investment across too few investments, you are exposing yourself to an unnecessarily high risk. Through appropriate diversification, the risk of a portfolio can be reduced not only to the average of the individual risks of the portfolio components, but usually also below it. The degree of risk reduction depends on how independently the prices of the portfolio components develop from one another.

The correlation expresses the extent to which the price development of the individual portfolio components depends on one another. To reduce the overall risk of the portfolio, investors should allocate their funds among investments that have the lowest possible or negative correlation with each other. For this purpose, investments can, among other things, be spread across regions, sectors and asset classes. Losses from individual investments can be partially offset by gains from other investments.

3. General risks of capital investment

In addition to the specific risks of individual asset classes, investment instruments and investment services, there are general risks when investing. Some of these risks are described below.

3.1 Economic risk

The overall economic development of an economy typically occurs in waves, the phases of which can be divided into the upswing, peak phase, downturn and trough phase. These economic cycles and the associated interventions by governments and central banks can last for several years or decades and can have a significant impact on the performance of various asset classes. Unfavorable economic phases can therefore have a long-term impact on an investment.

3.2 Inflation risk

Inflation risk describes the risk of suffering financial loss due to currency devaluation. If inflation - i.e. the positive change in the prices of goods and services - is higher than the nominal interest rate on an investment, this results in a loss of purchasing power equal to the difference. In this case we speak of negative real interest rates.

The real interest rate can serve as a benchmark for a possible loss of purchasing power. If the nominal interest rate on an investment is 4% over a certain period of time and inflation is 2% over this period, this results in a real interest rate of +2% per year. In the event of inflation of 5%, the real interest rate would only be -1%, which would correspond to a loss of purchasing power of 1% per year.

3.3 Country risk

A foreign state can influence capital movements and the transferability of its currency. If a debtor resident in such a country is unable to fulfill an obligation (on time) despite his own solvency, this is referred to as a country or transfer risk. An investor can suffer financial loss as a result.

Reasons for influencing the financial markets and/or transfer restrictions despite sufficient creditworthiness can include: B. Foreign exchange shortages, political and social events such as changes in government, strikes or foreign policy conflicts.

3.4 Currency Risk

When investing in a currency other than the investor's home currency, the return achieved does not depend exclusively on the nominal return of the investment in the foreign currency. It is also influenced by the development of the exchange rate of the foreign currency to the home currency. Financial loss can occur if the foreign currency in which the investment was made depreciates against the domestic currency. Conversely, a devaluation of the home currency can result in an advantage for the investor. A currency risk exists not only with cash investments in foreign currencies, but also with investments in stocks, bonds and other financial products that are quoted in a foreign currency or pay distributions in a foreign currency.

3.5 Liquidity risk

Investments that can usually be bought and sold on a short-term basis and whose buying and selling prices are close to each other are said to be liquid. There are usually a sufficient number of buyers and sellers for these investments to ensure continuous and smooth trading. However, in the case of illiquid investments or in market phases in which there is insufficient liquidity, there is no guarantee that an investment can be sold at short notice and at low price discounts. This can lead to financial losses if, for example, an investment can only be sold at a price loss.

3.6 Cost risk

Costs are often neglected as a risk factor in capital investments. However, open and hidden costs are crucial to investment success. For long-term investment success, it is essential to pay great attention to the costs of an investment.

Credit institutions and other securities institutions generally pass on transaction costs for the purchase and sale of securities to their customers and may additionally charge a commission for executing the order. In addition, banks, fund providers or other securities service providers or intermediaries usually charge so-called follow-up costs, such as costs for custody account management, management fees, issuing surcharges or pay commissions, which are not readily apparent to the customer. These costs should be taken into account in the overall economic analysis: the higher the costs, the lower the return the investor can actually achieve.

3.7 Tax risks

Income generated from investments is generally subject to taxes and/or duties for the investor. Changes in the tax framework for capital gains can lead to a change in the tax and duty burden. Investments abroad may also result in double taxation. Taxes and duties therefore reduce the investor's actually achievable return. In addition, tax policy decisions can have a positive or negative impact on the price development of the capital markets as a whole.

3.8 Risk of credit-financed investments

Investors may be able to obtain additional funds for capital investment by borrowing or lending against their securities with the aim of increasing the investment amount. This approach creates a leverage effect on the capital invested and can lead to a significant increase in risk. If the portfolio value falls, it may no longer be possible to meet the additional payment obligations for the loan or the interest and repayment demands of the loan and the investor is forced to (partially) sell the portfolio. Loan-financed capital investments are therefore generally not recommended. Investors should only use freely available capital for their investments, which is not required for their ongoing lifestyle or covering current liabilities.

3.9 Risk of incorrect information

Accurate information forms the basis for successful investment decisions. Wrong decisions can be made due to missing, incomplete or incorrect information as well as incorrect or delayed transmission of information. For this reason, it may be appropriate in some circumstances not to rely on a single source of information but to obtain additional information.

3.10 Risk of self-custody

Keeping securities in your own custody opens up the risk of losing the documents. Obtaining new securities certificates that represent the investor's rights can be time-consuming and costly. Self-custodians also risk missing important deadlines and appointments, meaning that certain rights can only be asserted late or no longer at all.

3.11 Risk of custody abroad

Securities purchased abroad are usually held abroad by a third party selected by the custodian bank. This can lead to increased costs, longer delivery times and uncertainties regarding foreign legal systems. Particularly in the event of insolvency proceedings or other enforcement measures against the foreign custodian, access to the securities may be restricted or even excluded.

4. How different asset classes work and risks

4.1 Shares

4.1.1 General

Stocks are securities that are issued by companies to raise equity capital and certify a share in a company's equity capital. A shareholder is therefore not a creditor as with a bond, but rather a co-owner of the company. The shareholder is involved in the economic success and failure and participates in it through profit distributions, so-called dividends, and through the price development of the share. There are different types of shares that have different rights. The most important types are ordinary shares, preferred shares, bearer shares and registered shares. Ordinary shares carry voting rights and are the most common type of share in Germany. In contrast, preferred shares do not carry voting rights. To compensate, shareholders receive preferential treatment, e.g. B. when paying dividends. In the case of a bearer share, the shareholder does not need to be registered in a share register. The shareholder can exercise his rights even without registration. Bearer shares are therefore easier to transfer, which typically improves tradability. In the case of a registered share, the name of the holder is entered in a share register. Without registration, the rights arising from ownership of the share cannot be asserted. In the past, stocks have had higher long-term returns or risk premiums compared to other asset classes. However, it is important to note that the historical performance of individual stocks or stock indices does not allow any conclusions to be drawn about future developments. The American stock index S&P 500, which includes the shares of the 500 largest listed US companies, achieved an average annual return of 9.6% between 1928 and 2014. During the same period, an investment in 10-year US government bonds returned 5.0%. An investment in the stock index gave an investor an additional return or risk premium of 4.6% p.a. However, this also entailed a comparatively higher risk: stock returns on the S&P 500 had an average annual fluctuation range of almost 20%. American government bond yields fluctuated only about 8% over the same period. In the 86 years of observation, the maximum loss of an investment in the broadly diversified S&P 500 stock index was -44%; The maximum loss of an investment in American government bonds, however, was -11.12%.

4.1.2 Special risks

* Price risk: Shares can be traded on the stock exchange, but also over the counter. The price of a share is determined by supply and demand. There is no calculation formula for the “correct” or “fair” price of a share. Models for calculating share prices are always subject to subjective assumptions. Price formation depends to a large extent on the different interpretations of the available information by market participants. Numerous empirical studies show that stock prices cannot be forecast systematically. Stock prices are influenced by many factors. The associated risk of a negative price development can be roughly divided into company-specific risk and general market risk. The company-specific risk depends on the economic development of the company. If the company develops economically worse than expected, negative share price developments may occur. In the worst case scenario, namely in the event of insolvency and subsequent insolvency of the company, the investor can suffer a total loss of his invested capital. However, it can also happen that the price of a share moves due to changes in the overall market without this price change being based on company-specific circumstances. Price changes that arise due to general trends on the stock market and are independent of the economic situation of the individual company are referred to as general market risk.

* Insolvency risk: Since shareholders are only served in the event of insolvency when all other creditor claims have been satisfied, shares are to be viewed as an asset class with a relatively high risk.

* Dividend risk: Shareholders' participation in the company's profits through monetary distributions is called dividends. Just like a company's future profits, future dividends cannot be predicted. If a company generates less than planned profit or no profit and has not created any reserves, the dividend can be reduced or suspended entirely. However, a stock investor is not entitled to a distribution even if a profit is made. If provisions are made e.g. B. if the company deems it necessary due to expected future costs (lawsuits, restructuring, etc.), it may be able to suspend the dividend despite a profit being made.

* Interest rate change risk: As interest rates rise, share prices may decline, e.g. B. The company's borrowing costs may increase or future profits may be discounted at a higher interest rate and therefore valued lower at the present time.

* Liquidity risk: Usually, exchange-traded stocks, especially when it comes to companies with a high enterprise value, are part of a significant stock index, such as. B. the DAX, buying and selling prices are constantly provided. If there are no tradable prices on the market for various reasons, the shareholder will temporarily have no opportunity to sell his share position, which can have a negative impact on his investment.

4.2 Bonds

4.2.1 General

Bonds refer to a wide range of interest-bearing securities, also known as bonds. In addition to “classic” bonds, these also include index bonds, Pfandbriefe, inflation bonds and structured bonds. The basic functionality is common to all types of bonds. In contrast to stocks, bonds are issued by companies as well as by public institutions and states (so-called issuers). They do not grant the holder any share rights. By issuing bonds, an issuer raises debt capital. Bonds are tradable securities with a face amount (amount of debt), an interest rate (coupon), and a set term.

As with a loan, the issuer undertakes to pay the investor a corresponding interest rate. Interest payments can be made either at regular intervals during the term or cumulatively at the end of the term. At the end of the term, the investor also receives the nominal amount. The amount of interest you pay depends on various factors. The most important parameters for the interest rate are usually the creditworthiness of the issuer, the term of the bond, the underlying currency and the general level of market interest rates. With inflation bonds, the nominal amount and interest rate also depend on the development of inflation.

Depending on the method of paying interest, bonds can be divided into different groups. If the interest rate is fixed in advance over the entire term, this is called “straight bonds”. Bonds for which the interest rate is linked to a variable reference interest rate and whose interest rate can change during the term of the bond are called “floaters”. A possible company-specific premium or discount to the respective reference interest rate is usually based on the credit risk of the issuer. A higher interest rate generally means a higher credit risk. Just like stocks, bonds can be traded on stock exchanges or over the counter.

The income that investors can achieve by investing in bonds results from the interest on the nominal amount of the bond and from any difference between the buying and selling prices. Empirical studies show that the average returns achieved with bonds over a longer period of time have in the past been higher than with investments in fixed-term deposits, but were lower than with investments in stocks.

4.2.2 Special risks

* Issuer/Credit Risk: An obvious risk when investing in bonds is the issuer's risk of default. If the issuer is unable to fulfill its obligation to the investor, the investor is at risk of a total loss. In contrast to stock investors, an investor in bonds is in a better position in the event of insolvency because he provides the issuer with debt capital and his claim can be satisfied (if necessary partially) from any insolvency estate that may arise. The creditworthiness of many issuers is assessed at regular intervals by rating agencies and divided into risk classes. An issuer with a poor credit rating usually has to pay a higher interest rate to bond buyers to compensate for the credit risk than an issuer with an excellent credit rating. In the case of secured bonds (“covered bonds”), the creditworthiness depends primarily on the extent and quality of the collateral (cover pool) and not exclusively on the creditworthiness of the issuer.

* Inflation risk: Inflation risk refers to the change in the purchasing power of the final repayment and/or interest income from an investment. If inflation changes during the term of a bond in such a way that it is higher than the interest rate of the bond, the investor's effective purchasing power decreases (negative real interest rates).

* Interest rate risk and price risk: The key interest rate level determined by the central bank has a significant influence on the value of a bond. For example, when interest rates rise, the interest on a bond with a fixed interest rate becomes relatively less attractive and the price of the bond falls. An increase in market interest rates is usually accompanied by falling bond prices. Even if an issuer pays all interest and the principal amount at the end of the term, a bond investor may still incur a loss if, for example, he sells before the end of the term at a price that is lower than the issue or purchase price of the bond.

4.3 Raw materials

4.3.1 General

Capital investments in raw material products are counted among the alternative asset classes. Unlike stocks and bonds, raw materials, when traded for capital investment purposes, are usually not physically transferred, but rather traded via derivatives (usually futures, forwards or swaps). Derivatives are contracts in which the contracting parties agree to buy or sell a specific asset (underlying asset) in the future at a specified price. Depending on whether the market price of the commodity is above or below the agreed price, the value of the derivative is positive or negative. In most cases there is no actual delivery of the raw materials, but rather a compensation payment for the difference between the market price and the agreed price. This approach makes trading easier because challenges such as storage, transportation and insurance of raw materials can be ignored. However, this synthetic type of capital investment in raw materials comes with some special features that need to be taken into account. Commodities only offer an investor the prospect of income through price gains and do not offer any distributions.

If the investor only wants to invest in one commodity, he must buy a corresponding security that reflects the performance of raw materials (Exchange Traded Commodities, ETCs). ETCs are traded on the stock exchange like ETFs. However, there is an important difference to note: the capital invested in an ETC is not a special fund that is protected in the event of the issuer's insolvency. An ETC is a bond issued by the ETC issuer. Compared to a (physical) ETF, the investor with an ETC therefore has an issuer risk. To minimize this risk, issuers use different methods of collateralization. The criteria relevant for selecting an ETF apply accordingly to ETCs (see Section 4.6.4).

4.3.2 Special risks

* Price risk: In general, investments in raw materials are exposed to the same price risks as direct investments in raw materials. Special events such as natural disasters, political conflicts, government regulations or weather fluctuations can influence the availability of raw materials and thereby lead to a drastic change in the price of the underlying asset and possibly also of the derivative. This can also lead to a restriction in liquidity and result in falling prices. As a production factor for industry, the demand for certain raw materials such as metals and energy sources also depends significantly on general economic development.

* Counterparty risk: Trading via derivatives poses a risk with regard to the structure of the derivative contract. If the contractual partner is unable or unwilling to fulfill its obligation under the derivative contract, the derivative contract may not be fulfilled in whole or in part.

4.4 Foreign currencies

4.4.1 General

Investments in foreign currencies offer investors an opportunity to diversify their portfolio. Furthermore, investments include: Investing in the previously mentioned asset classes often involves taking on foreign currency risks. For example, if a German investor invests directly or indirectly (e.g. via a fund or ETF) in American stocks, his investment is not only subject to stock risks, but also to the exchange rate risk between the euro and the US dollar, which can have a positive or negative impact on the value of his investment.

4.4.2 Special risks

* Exchange rate risk: Exchange rates of various currencies can change over time and significant fluctuations in exchange rates can occur. For example, if a German investor invests in US dollars or in a stock quoted in US dollars, a depreciation of the US dollar against the euro (i.e. appreciation of the euro) will have a detrimental effect on their investment. Under certain circumstances, even a positive share price development can be overcompensated by the weakening of the US dollar.

* Interest rate risk: If interest rates change in the home market or in the foreign currency market, this can have a significant impact on the exchange rate, as changes in interest rates can sometimes trigger large cross-border capital movements.

* Regulatory risks: Central banks play a crucial role in the pricing of exchange rates. In addition to money supply and interest rates, some central banks also control exchange rates. They intervene in the markets as soon as certain thresholds are reached by selling or buying their own currency or they peg the exchange rate in whole or in part to a foreign currency. If these strategies are changed or canceled, this can lead to significant disruptions in the relevant foreign exchange markets. This was observed, for example, when the Swiss National Bank abandoned the setting of the minimum exchange rate of the Swiss franc against the euro of 1.20 EUR/CHF in January 2015 and the exchange rate fell from 1.20 EUR/CHF to 0.97 EUR/CHF on the same day.

4.5 Real Estate

4.5.1 General

This asset class includes residential real estate (e.g. apartments and terraced houses), commercial real estate (e.g. office buildings or retail spaces) and companies that invest in or manage real estate. The investment can be made either directly by purchasing the real estate or indirectly by purchasing shares in real estate funds, real estate investment trusts (REITs) and other real estate companies.

4.5.2 Special risks

* Income risk: The purchase of real estate requires a high investment at the beginning, which is only amortized over time through cash flows from rental and leasing. However, the earnings situation can be relatively easily disrupted by restrictions on usability in terms of time and material, so that the amortization of the initial investment takes a longer period of time.

* Valuation risk: A variety of criteria play a role when evaluating a property (location, size, environment, usable area, etc.). In addition, the real estate market consists of spatially separated sub-markets. For these reasons, real estate valuation is exposed to numerous imponderables that are difficult to predict in detail.

* Liquidity risk: Real estate is a relatively illiquid asset class because, due to the high degree of individuality of real estate and the existence of sub-markets, the process of valuation, sale and transfer of ownership can take a longer period of time. A quick realization of the value of a property is therefore usually not possible. The indirect acquisition of real estate through shares in real estate companies reduces this risk.

* Transaction costs: The process of valuation, sale and transfer of ownership of direct real estate investments causes relatively high costs compared to financial investments.

* Price risk: When investing indirectly in real estate by purchasing shares in real estate funds or REITs, the investor is exposed to price risk. The price can change in the course of general market fluctuations without the fund's situation having changed.

4.6 Open-ended investment funds

4.6.1 General

Investment funds are vehicles for collective investment in accordance with the regulations of the Capital Investment Code. A distinction must be made between open investment funds, which are open to an unlimited number of investors, and closed investment funds, which are open to a limited number of investors. A capital management company determines the investment strategy of an open-ended investment fund and manages the fund assets professionally. As a special fund, the fund assets must be strictly separated from the assets of the capital management company for reasons of investor protection. For this reason, the assets belonging to the investment fund are held by the so-called custodian. Depending on the type of investment fund, the fund assets can consist of a wide variety of assets (e.g. securities, money market instruments, bank deposits, investment shares and derivatives).

Investors can acquire joint ownership of the fund assets at any time by purchasing investment share certificates through a credit institution or the capital management company. However, under certain circumstances, the capital management company can temporarily limit, suspend or permanently stop the issue of fund shares. The investment shares can be liquidated in two ways. On the one hand, it is generally possible to return the investment share certificates to the capital management company at the official redemption price. On the other hand, the investment share certificates can possibly be traded on a stock exchange. Both in the case of the purchase and liquidation of investment share certificates, third-party costs may arise (e.g. issue surcharge, redemption fee, commission).

The value of an individual investment share certificate is calculated based on the value of the fund assets divided by the number of investment share certificates issued. The value of the fund assets is usually determined using a specified valuation procedure. Continuous exchange trading is also available for price determination for exchange-traded investment funds.

The key investor information, the sales prospectus and the investment conditions provide information about the investment strategy, the ongoing costs (management fee, operating costs, custodian costs, etc.) and other essential information about the open-ended investment fund. In addition, the semi-annual and annual reports to be published are an important source of information.

Foreign capital management companies can be legally structured differently than their German counterpart. However, if these foreign capital management companies distribute open-ended investment funds in Germany, they must meet certain legal requirements and are subject to the supervision of German supervisory authorities.

The different types of open investment funds can be differentiated according to the following criteria:

* Composition: The fund assets can be made up of different asset classes (e.g. stocks, interest-bearing securities, raw materials).

* Geographic focus: Mutual funds can either focus on specific countries or regions or invest globally.

* Investment horizon: Open-ended investment funds can have a fixed or unlimited term.

* Use of income: Open investment funds can distribute the income regularly or use it to increase the fund assets (accumulate).

* Currency: The prices of the investment share certificates of open-ended investment funds can be offered in euros or a foreign currency.

* Hedging: The capital management company or a third party can guarantee a certain performance, certain distributions or a certain preservation of value.

4.6.2 Exchange Traded Funds in particular

Exchange Traded Funds (“ETFs”) are exchange-traded open-ended investment funds that track the performance of an index – such as the DAX. They are also known as passive index funds. In contrast to active investment strategies, which aim to achieve an excess return (“outperformance”) compared to a comparative index (“benchmark”) by selecting individual securities (“stock picking”) and determining favorable times for entry and exit (“market timing”), a passive investment strategy is aimed at not outperforming a comparative index, but rather replicating it at the lowest possible cost.

Like other open-ended mutual funds, ETFs give investors access to a broad portfolio of stocks, bonds or other investment categories such as commodities or real estate. Unlike other open-ended investment funds, ETFs are usually not bought or sold directly from a capital management company, but trading takes place on a stock exchange or other trading venue. An ETF can therefore be traded like a share on stock exchanges. In order to improve liquidity, market makers are usually appointed for ETFs, which are intended to ensure sufficient liquidity by regularly providing buying and selling prices. However, there is no obligation to provide liquidity.

ETFs can track their underlying indices in two different ways. With physical representation (so-called replication), the index is replicated by purchasing all index components (e.g. the 40 shares of the DAX) or, if necessary, a relevant subset. With synthetic replication, the ETF provider enters into an agreement in the form of a swap with a bank in which the exact performance of the desired index is guaranteed and secured. A synthetic ETF therefore does not hold the underlying stocks.

4.6.3 Special risks

* Price risk: Because ETFs passively track an underlying index and are not actively managed, they generally bear the basis risks of the underlying indices. ETFs therefore fluctuate in direct proportion to their underlying value. The risk-return profile of ETFs and their underlying indices are therefore very similar. If the DAX falls, for example B. by 10%, the price of an ETF tracking the DAX will also fall by around 10%.

* Risk concentration: Investor risk increases as an ETF becomes more specialized, for example in a certain region, industry or currency. However, this increased risk can also bring with it increased profit opportunities.

* Exchange rate risk: ETFs contain exchange rate risk if their underlying index is not quoted in the ETF's currency. If the index currency weakens compared to the ETF's currency, the performance of the ETF will be negatively affected.

* Replication risk: ETFs are also subject to a replication risk, i.e. there may be deviations between the value of the index and the ETF (“tracking error”). This tracking error may extend beyond the difference in performance caused by ETF fees. Such a deviation can e.g. B. caused by cash holdings, rebalancing, corporate actions, dividend payments or the tax treatment of dividends.

* Counterparty risk: In addition, there is a counterparty risk with synthetically replicating ETFs. If a swap counterparty fails to meet its payment obligations, the investor may suffer losses.

* Risk of transfer or termination of the special fund: Under certain conditions, both the transfer of the special fund to another special fund and the termination of management by the capital management company are possible. In the event of a transfer, continued management may take place on worse terms. In the event of termination, there is a risk of (future) lost profits.

* Over-the-counter trading: If ETFs and their underlying components are traded on different exchanges with different trading hours, there is a risk that trades in these ETFs are carried out outside the trading hours of the respective components. This may result in a deviation in performance compared to the underlying index.

* Securities lending: An investment fund can enter into securities lending transactions to optimize returns. If a borrower cannot meet his obligation to return the security and the security provided has lost value, the investment fund is at risk of losses.

4.6.4 Important criteria for selection

When selecting ETFs, the following criteria should be taken into account in particular:

* Low costs: Avoiding costs is one of the most important criteria for long-term investment success. When selecting ETFs, particular attention should be paid to the total costs of index replication (“Total Expense Ratio”, TER) as well as the even broader total costs of an investment (“Total Cost of Ownership”, TCO), which also take external trading costs such as bid-ask spreads, taxes and broker commissions into account.

* High liquidity: ETFs with low trading liquidity tend to have wider bid-ask spreads, which increases trading costs. When selecting ETFs with large investment volumes and several market makers, preference should be given to ensuring the best possible tradability and keeping trading costs low.

* Low tracking error: The tracking error indicates the accuracy of the index replication. It is advisable to ensure that the ETF's performance deviates slightly from the underlying index in order to achieve the most accurate reflection of the intended investment market.

* Appropriate diversification: ETFs usually track broad indices with a large number of individual stocks. Depending on the ETF, these can be spread across countries, currencies and sectors. This broad risk diversification enables access to the fundamental return drivers of the respective asset class without having to accept high individual risks. However, very broad indices may also contain a number of small companies with low liquidity and therefore higher trading costs. When selecting, attention should be paid to a balanced and favorable ratio of risk diversification and implicit trading costs of the ETFs.

* Robust replication method: ETFs are offered in two basic versions: with physical and synthetic replication of the underlying index. Synthetically replicating ETFs have an increased risk profile compared to physically replicating ETFs because synthetic ETFs are dependent on their swap counterparties and therefore have a certain risk of default. Therefore, physically replicating ETFs are often preferred due to their somewhat more robust and reliable form of investment. However, for investments in certain markets, such as raw materials markets or emerging markets, physical replication is not possible or not economical. In these cases, synthetically replicating ETFs offer a good market access option.

5. Functionality and risks of trading securities

5.1 Execution principles, selection principles and conflicts of interest

Buy and sell orders are executed by the custodian bank in accordance with its special conditions for securities transactions and its execution principles. If the orders are placed by an asset manager, their selection or execution principles must also be observed. In addition, the respective conditions for dealing with conflicts of interest (“Conflict of Interest Policies”) may contain relevant provisions. The customer's orders can be combined with orders from other customers.

5.2 Commission and fixed price

Securities arrangements made by the bank for the customer can be carried out using fixed-price or commission transactions. As part of a fixed-price transaction, the bank sells or buys the relevant securities directly to or from the customer at an agreed price. As part of a commission transaction, the bank buys or sells the relevant securities for the account of the customer, so that the conditions agreed with the third party are economically attributed to the customer.

5.3 Exchange and over-the-counter trading

Customer orders can be executed on stock exchanges or over-the-counter trading venues, such as in interbank trading or within the framework of multilateral trading systems. Stock exchanges are organized and regulated markets for stocks, other securities and goods. The different types of stock exchanges can be differentiated according to the level of regulation (regulated market or open market) and the type of trading (on-site trading or electronic trading system).

5.4 Pricing

In floor trading, the so-called lead broker determines the corresponding price either as part of variable trading or according to a standard price. The principle of most execution applies when determining the unit price. This means that the price is determined as the execution price at which the greatest turnover is achieved with the lowest overhang. In electronic trading, prices are determined by electronic systems according to certain rules and usually also in compliance with the most execution principle.

5.5 Instructions and Limits

Buy and sell orders are executed by the custodian bank in accordance with its special conditions for securities transactions and its execution principles. However, instructions from the customer take priority. These instructions can set price and time limits (limits, period of validity or limit additions). In this way, the customer can “fine-adjust” the respective order.

5.6 Special Risks

* Transmission risk: If the customer places orders that are not clear, there is a risk of errors in order execution.

* Lack of market liquidity: If there is a lack of market liquidity, the customer's order cannot be executed or can only be executed with a delay.

* Price risk: There may be a certain amount of time between order placement and execution. This can lead to the stock market price developing disadvantageously in the meantime.

* Trading suspension and other protective measures: Exchange trading can be suspended if orderly exchange trading is temporarily at risk or if this appears necessary to protect investors. In addition, trading interruptions may occur due to increased volatility in stock market prices.

* Collective orders: They can have a negative impact on pricing on the market or lead to a reduced allocation for the individual customer due to an excessive order volume. In the latter case, the order allocation principles of the custodian bank and, if applicable, the asset manager apply, which regulate the proper allocation of combined orders and transactions, taking into account the influence of volume and price on the allocation and partial execution of orders.

6. Functionality and risks of investment services

Various investment services are offered for capital investments. Before customers decide on an offer, it is very important to understand the differences and the typical associated risks and conflicts of interest.

6.1 Pure execution transaction

In pure execution transactions (also called “execution only”), the custodian bank only acts at the customer’s request to execute securities orders. There is no consultation or review of appropriateness. Due to legal regulations, pure execution transactions may only be carried out for non-complex financial instruments (e.g. shares, money market instruments, bonds or mutual funds). Upon execution, the customer receives a securities statement which contains the essential execution data (in particular the type of order, name of the securities, number of units/nominal amount, transaction value, place and time of execution, execution price, fulfillment date).

6.2 Advice-free business

An advice-free transaction occurs when the customer makes an investment decision without having previously been given an investment recommendation by a bank. The bank's obligation to explore is significantly reduced compared to investment advice or financial portfolio management. In contrast to pure execution transactions, however, there is at least a limited obligation to explore.

6.3 Investment and transaction brokerage

No advice is given to the customer when it comes to investment and financial brokerage. The customer is simply provided with a financial product. An examination of the suitability of the financial investment for the customer is not necessary and therefore does not take place or only to a limited extent. When brokering, the financial product to be brokered is typically exclusively or predominantly advertised. This may give the customer the false impression that this is investment advice. The remuneration for an investment and contract brokerage usually takes place via a reimbursement from the provider or issuer of the financial product directly to the broker, for example via a brokerage commission included in the financial product or a premium paid by the customer.

6.4 Investment advice

When providing investment advice, an investment advisor recommends certain securities to the client to buy or sell. The advisor is obliged to check the suitability of the recommended investment for the customer, taking into account the investment objectives, financial situation, risk appetite as well as his knowledge and experience, and to record this in an advisory protocol. However, the decision to implement the advisor's recommendation must be made by the customer himself. The customer must take action for each transaction themselves and may need to seek further advice. The advisor has no obligation to continually review the investment recommendation or the customer portfolio.

There are basically two remuneration models: fee-based and commission advice. The remuneration for both types of investment advice carries the potential for conflict. With fee-based consulting, the consulting service is usually billed directly to the customer on a time basis. This gives the consultant the incentive to bill as many consulting hours as possible. With commission advice, the customer is not billed directly for the service because the advisor receives a commission from his employer or from the provider of the investment product (e.g. from the investment company or the issuer of a certificate). This carries the risk that the customer will not be offered the most suitable security for him, but rather the most lucrative security for the advisor.

6.5 Financial portfolio management

Financial portfolio management (also called asset management) is fundamentally different from the investment services described previously. The asset manager receives the authority from the customer to make investment decisions at his own discretion if they appear appropriate for the management of the customer's assets.

A separate depot and clearing account is set up for the customer. The customer is the owner of the deposit and account and is the only one who can make transfers and withdrawals. The asset manager receives a power of attorney that entitles him to carry out securities transactions in the name and on behalf of the customer. However, he may not, in principle, acquire ownership of the customer's assets or transfer them to non-customer custody accounts or accounts. When making investment decisions, the asset manager does not have to obtain instructions from the customer, but is bound to the previously agreed investment guidelines, which regulate his authority and the type and scope of the service. The powers of the asset manager come with extensive duties. The asset manager not only undertakes securities transactions for the client, but is also responsible for monitoring the portfolio.

Asset management is typically a service aimed at long-term wealth creation or preservation. The client should therefore have a long-term investment horizon as this increases the likelihood that the portfolio can recover in the event of negative performance. It is advisable to only use assets for asset management that are not needed to cover short and medium-term lifestyle needs or meet other liabilities.

Asset management also involves a number of risks for the customer's financial situation. Although the asset manager is obliged to always act in the best interests of the client, poor decisions and even misconduct can occur. The asset manager cannot guarantee success or the avoidance of losses. Even without intent or negligence, the agreed investment guidelines can be violated by market behavior.

Asset management requires permission from the Federal Financial Supervisory Authority (BaFin). In the application for permission, BaFin checks, among other things, the suitability of the management, but it expressly does not approve or approve the specific services or products offered.

As regulated securities institutions, asset managers licensed in Germany belong to the compensation scheme for securities trading companies (EdW). The EdW pays compensation if a securities trading company is no longer able to meet its liabilities from securities transactions to its customers and BaFin has determined that there is a need for compensation. For these claims, protection is limited to 90% of the claims, but a maximum of 20,000 euros per investor. However, the risk of improper asset management or abuse of authority by the asset manager is not covered by the EdW.

As of: May 14, 2024

Gerd Kommer Invest GmbH
(wealth management)
Sendlinger Strasse 41
80331 Munich