Applying a risk-rating to existing funds without changing the way they are managed can be misleading for both financial advisers and retail investors, says Skandia Investment Group.
The asset manager believes there is now an important distinction between risk-rated funds that are given a snapshot risk score at a single point in time and risk-targeted funds that are managed specifically to remain within a set level of volatility on an ongoing basis.
Following the success of risk-targeted funds such as the £1.5 billion* Skandia Spectrum funds range, other fund groups are looking at launching risk-rated solutions ahead of the Retail Distribution Review in response to demand for outcome orientated solutions. However, simply trying to apply some kind of risk grading to existing multi-asset ranges could potentially be misleading for financial advisers and investors.
This is because applying a risk score to an existing fund based on historical performance does not mean it will deliver that level of risk in future. A snapshot risk-rating means that a fund might be judged as a risk level 3 or 4 and then recommended on that basis, but unless the goal of the fund includes a volatility target it could end up being a 7 or 8 in the future.
John Ventre, lead portfolio manager of the Skandia Spectrum Fund range, explains:
"Risk-rating looks at what a fund currently holds, or how its track record of performance has been over time, and then carries out a risk assessment. Risk-targeting, meanwhile, is all about a fund having a specific objective to deliver to a certain level of volatility. If it is carried out correctly, risk-targeting results in far more certainty that the fund will continue to be suitable for an individual customer, than a risk-rated approach, as the latter may subsequently change its asset allocation, becoming more or less risky as a result."
A true risk-targeted fund range will have been solely built and designed to target risk and this is a very different proposition to funds that have historically been built and managed to maximise returns almost regardless of risk. The danger is that these existing funds are now being shoe-horned into a risk based proposition simply by being risk profiled by an external company.
Graham Bentley, head of UK proposition at Skandia, comments:
"Financial advisers and investors should beware of imitations of risk-targeted funds. In launching the Skandia Spectrum Funds we took a commercial risk in challenging conventional fund design and distribution. Now it is a proven success a number of legacy funds have jumped on the band wagon and are giving themselves a risk rating. However, the way these funds are being managed has not necessarily changed. This can potentially be misleading for advisers and investors if they think they are buying a fund that specifically targets a level of risk when in reality it may not"
|
