Traditional managed funds, such as cautious or balanced managed funds, are another approach that investors looking to manage risk have chosen, says Anthony Gillham, portfolio manager of the Old Mutual Voyager Strategic Bond fund.
Mr Gilham says managers of these funds often employ a sector approach to construct a portfolio, with the manager deciding on the relative riskiness of different asset classes by reference to qualitative criteria or sector constraints, such as a limit on the total amount of equity.
The drawback to this approach, according to Mr Gilham, is that there can be great variation in the views among different managers and individuals about what constitutes a ‘lower risk’ asset or what results a ‘cautious’ managed fund might be expected to achieve.
In other words, Mr Gilham says there is no clear yardstick for investors to determine what the outcomes of the fund should be.
Patrick Connolly, Certified Financial Planner at Chase de Vere, says the best alternative to risk-rated funds is a combination of independent financial advice with a strategic long-term approach to asset allocation, where bespoke investment portfolios are established and run, and reviews undertaken, to meet the initial and changing needs of the client.
Mr Connolly says this is by far the best approach for those who are willing and able to pay for advice. For those who aren’t willing to pay the cost of independent financial adviser then Mr Connolly says some form of compromise will be required and using these funds is likely to be exactly that.
The best alternative to risk-rated, risk-targeted and risk-managed funds is building a portfolio of single asset class investment funds, says Martin Bamford, Chartered Financial Planner and managing director at Informed Choice, based around an underlying asset allocation model which is suitable for the level of risk an investor needs, wants and is able to take with their money.
He says this is always preferable to using risk rated funds as it places the investor and their adviser in more direct control of the level of risk being taken.
