Your IndustryJun 5 2014

Differences between risk-rated, targeted and managed funds

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The main difference between risk-rated, targeted and managed funds is how and when the risk taken by managers of these funds is assessed.

Risk-rated funds are those that have been assigned a number by a ratings agency according to the risk they are targeting, according to Michael Holland, managing director of FE.

Mr Holland says risk-targeted and risk-managed funds are those that actively target a certain level of risk. Here, he says the risk targeting is done by the fund manager.

Mr Holland says: “All these measures are forward looking – they rate, target and manage risk according to what the fund will aim to do.”

Lorna Blyth, investment marketing manager of Scottish Life, says a risk-rated fund has been given a risk profile at a point in time, usually by a third party, based on how the fund has performed historically.

The approach taken by risk-rated funds therefore provides no indication of the fund’s future expected performance, she points out. She says risk ratings are usually reviewed on a regular basis and it is possible for the fund’s risk rating to be changed as a result of a review.

Risk-targeted funds rather have a specific objective to maximise returns to investors within a risk profile defined by the fund manager. Typically she says this is measured in terms of volatility bands and provides an indication of how the fund will be managed in the future.

Ms Blyth says risk-managed funds on the other hand operate a process to manage risk within a volatility cap. She says this can be a mechanism that automatically reduces the fund’s exposure to risk assets, if the actual volatility of the fund exceeds a pre-set limit.