OMGI warns of ‘danger’ of risk-targeted fund sectors

Old Mutual Global Investors’ (OMGI) John Ventre has warned against a rush to launch dedicated sectors for risk-targeted funds.

Last month advisers called on the Investment Management Association (IMA) to follow up on work by data provider FE, which introduced peer groups for funds that target a specific level of risk. There are more than 200 individual unitised funds from 35 providers contained within the five FE peer groups.

The IMA said its sector committee would monitor the progress of FE’s work in the coming months, but Mr Ventre – head of multi-asset at OMGI and manager of the seven-strong Spectrum risk-targeted range – said the introduction of such peer groups could be “fraught with danger”.

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“You want to be careful that what you’re doing isn’t creating a benchmark that encourages risk-taking,” he said.

“The measurement techniques are crucial – funds need to be measured on a risk-adjusted return. I have my doubts about whether the industry is ready for that analysis in terms of measuring performance.

“It would be useful to have a means of comparing solutions across the industry, but I don’t think that it is just around the corner.”

Mr Ventre also argued that risk-targeted funds and model portfolios should be compared using more than just historical performance data. “It’s also about managing risk and drawdown appropriately,” he added.

He cited the example of the seven Spectrum funds, saying the portfolios were currently recording a volatility level below their targets due to equity markets being “much less volatile than they should be”.

The Spectrum funds currently sit in the IMA Unclassified sector alongside a large number of risk-targeted products. The range has £2.1bn in assets, and all but the highest-risk fund have outperformed FE’s risk-targeted sectors in the five years to April 28.