Risk-rated, risk-targeted and the former Balanced Managed

This article is part of
‘Balanced Managed’ funds - February 2014

At the beginning of 2012, the Investment Management Association renamed its Balanced Managed sector as the less-catchy IMA Mixed Investment 40-85% Shares sector.

The actual definition of the sector has changed little, but the renaming of the Active, Balanced and Cautious Managed sectors signifies an active attempt by the fund management trade body to distance itself from names which might suggest a certain level of risk.

It was often claimed, in the case of the IMA Balanced Managed sector, that a maximum 85 per cent weighting to equities was not exactly the dictionary definition of ‘balanced’.

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But while the IMA has distanced itself from anything that might imply a guarantee or a level of risk – take the renaming of the Absolute Return sector last year, for example – other, more explicit forms of risk-rating have emerged in the past few years.

Companies such as eValue, Distribution Technology, Finametrica and Oxford Risk have all developed their own methods for ascertaining the ‘risk’ of a fund or the tolerance of an investor – sometimes both.

Only Distribution Technology publicly lists the funds it rates on its website. Of the several hundred funds and models rated by the company, 42 sit in the IMA Mixed Investment 40-85% Shares sector – just under a third of the 151 members of that sector. These are roughly evenly split between DT ratings ‘5’ and ‘6’, out of a range of ‘1’ to ‘10’ where ‘1’ is equivalent to cash.

Risk-rated or risk-targeted?

Of course it is important to distinguish between how the risk rating is applied in each case. In some cases – such as Aberdeen’s Multi-Manager Balanced Managed fund and Jupiter’s Merlin Balanced fund – the risk rating has been applied to a product that has been operating for some years and is meant to be used as a ‘snapshot’ of the fund’s potential level of volatility. It is not guaranteed and is liable to change.

So why do it? Invariably it is a question of adviser demand.

Scott Spencer, a portfolio manager on Aberdeen’s multi-manager range, says: “While our funds are not managed specifically to the Distribution Technology profiles, we took the decision to rate our multi-manager funds in order to help advisers when recommending our funds to their clients.

“The comfort that comes with an external confirmation of risk profiling is becoming increasingly important in this post-RDR world as advisers can feel more confident matching client risk profiles to fund solutions and focus more of their energies on financial planning.”

Similarly, Fidelity’s Multi-Asset range – run by Trevor Greetham – has Distribution Technology ratings. But a spokesperson for Fidelity explained that the ratings were applied as “illustrative guidance” for advisers and investors alongside Fidelity’s own risk models.

This means that Fidelity’s Multi-Asset Growth, Multi-Asset Allocator Growth and Multi-Asset Open Growth funds in the IMA Mixed Investment 40-85% Shares sector could potentially shift DT risk bands – although given that the funds follow their own risk models this is unlikely.