Risk-rated funds are at risk of style drift and advisers must continue to monitor clients investments to make sure they remain suitable, according to Legal and General Investments multi-index funds lead manager Justin Onuekwusi.
Speaking to FTAdviser, he warned that while risk ratings are a useful tool, they are not in themselves a solution to the issue of ongoing suitability that many advisers face.
Mr Onuekwusi said:“Advisers have an additional due diligence burden to stay on top of such a fund and recommend that clients switch if the fund is no longer aligned to their client’s attitude to risk.
“Financial markets change all the time and a fund that is risk-rated 5 today, for example, could easily be rated 4 or 6 in a year’s time either due to a shift in the macroeconomic landscape or stock/sector allocation decisions taken by the manager.”
Mr Onuekwusi explained that L&G’s range focuses on risk targeting, which aims to solve this problem by aiming to always match a specific risk profile.
He said:“So if it is rated 5 today and the investment environment changes the fund managers can adapt the portfolio so that the rating doesn’t deviate – it will remain rated 5 and the investor will continue to have the same type of investment that they chose originally.”
He added that: “This is not to say that risk-rated funds do not have a place in client portfolios but advisers should be aware these funds may not be aligned with their clients’ attitude to risk on an ongoing basis.
“As an industry we have to do more to educate advisers to understand the differences between risk-rated and risk targeted funds and therefore select a solution which meets their clients’ requirements.”
Mr Onuekwusi joined the firm last August and this week his multi-index range of funds marked their first year anniversary.
The range is made up five risk-targeted multi-asset funds, diversified by asset class and offering exposure to UK and international equities and bonds by investing in L&G’s index tracking funds and the actively-managed L&G UK Property Trust.
