Multi-asset risk-rated and risk-targeted funds may have been designed with the goal of making advisers’ lives easier in a post-RDR landscape but in spite of their one-stop-shop attraction, for many investors they are no substitute for long-term advice.
Since the regulatory overhaul, there has been a marked uptick in the availability and popularity of such portfolios.
For example, in March last year, JPMorgan Asset Management launched its Fusion range of risk-rated multi-asset funds.
In addition, Legal & General brought its suite of risk-targeted multi-asset funds to the market and just last December, wealth manager London & Capital subscribed its suite of managed portfolios to independent risk profiler Distribution Technology, in a bid to make it easier for advisers to choose the most appropriate portfolio for their clients.
Given the rise of both risk-rated and risk-targeted funds, naturally some confusion has sprung up among investors between the two.
Essentially, risk-rated funds are independently assessed, via a qualitative and quantitative process, to determine their level of risk.
The funds are subsequently given a rating, most commonly on a scale from one to 10, with one being the lowest risk.
In theory, this means that investors and their advisers can carefully determine what their investment goals and attitude to risk is, find out what rating matches and then select an investment fund, or indeed fund number, that corresponds to their needs.
But Legal & General Investment Management’s Justin Onuekwusi, who co-manages the group’s risk-targeting multi-asset funds, is skeptical of the risk-rating approach.
He says: “Financial markets change all the time as political and economic events impact the world; so a fund which is rated five today, for example, could easily be rated four or six in a year or two’s time.”
Mr Onuekwusi argues that, under such circumstances, an investor will therefore be no longer holding an investment that matches their desired outcome and attitude to risk.
Justin Modray, founder of Candid Financial Advice, believes while risk-rated funds may suit some advisers and investors they should not be viewed as the easy option.
He says: “In spite of the amount of research put into risk-rating funds, ultimately one company’s version of risk – be that the assessor or fund manager – may not necessarily match up with the client.”
Jamie Farquhar, head of strategic relations at JP Morgan Asset Management, agrees that ongoing client advice is a must with risk-rated funds. He also highlights a further complication.
He says: “Many risk-rated funds could arguably adopt asset allocation models of the risk consultancy to ensure they meet and are awarded a particular rating and they are not going to fall foul of being moved either up or down.
“This is not the case with the Fusion range. You cannot farm out the asset allocation to a third party, the fund manager has to take that responsibility.
“We do run the risk that a fund could be moved either up or down the risk spectrum but risk ratings work on three-year rolling averages.”
But while risk ratings are designed to provide investors with an informed yardstick about what level of risk a particular fund will take, risk-targeted portfolios are a separate beast altogether.
A risk-targeted fund aims to control risk, such as that presented for example by volatility and liquidity over time.
The point is to build a portfolio that will deliver strong risk-adjusted returns in the future while strictly remaining in a particular risk profile.
Those in favour of risk-targeted funds argue that while risk-rated funds only tick the box for initial suitability, risk-targeted portfolios on the other hand tick that box for on-going suitability, of course, this is only the case if a client’s attitude to risk does not change.
Peter Chadborn, director at Plan Money, says he is using both styles more frequently but primarily for clients who have little appetite for engagement in the investment reviewing process.
He says: “It is essential that advisers are aware of the difference between these two styles as this is obviously very important when understanding and matching a client’s objectives.
“We do not believe one is better than the other, the key is understanding how each is managed to make sure that we are happy with it as a concept and we give our clients an accurate explanation.”
Philip Scott is a freelance journalist
