Industry weighs the benefits of sectors for risk-rated funds

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Discretionary Fund Management - March 2015

The terms ‘risk-targeted’ and ‘risk-rated’ may sound like yet more jargon for investors to familiarise themselves with but there are important differences between these two types of funds.

John Ventre, head of multi-manager at Old Mutual Global Investors, admits that the terms are guilty of causing confusion at times among advisers and investors.

“If we’re not careful, the phrases can be used interchangeably whereas from our perspective they are quite different beasts,” he says. “One is essentially explicitly risk-managed, whereas the other [risk-rated] is almost risk measured, as opposed to actually managed to that risk objective. So I do think it’s important that investors understand what they’re buying.”

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He adds: “If the fund is risk-targeted it should stay more stable in terms of its risk because it is, after all, the manager’s explicit objective to deliver to that risk target. Whereas if it’s just a risk-rating then obviously there are far fewer guarantees that you’ll experience the risk you expect.”

But Justin Onuekwusi, multi-asset fund manager at Legal & General, warns that the onus is on advisers to keep an eye on the risk rating of a fund and note if or when that changes.

He adds: “For a risk-rated fund, you have to stay on top of the drift because if a fund drifts across risk profiles it’s not the responsibility of the fund manager to communicate, it’s the responsibility of the adviser to ensure that the fund is in the right risk profile. So all the accountability lies with the adviser.”

The industry has been mulling the possibility of sectors for risk-targeted funds, although the Investment Association is yet to go down this route.

Financial Express has ventured into this territory with risk-targeted multi-asset solutions sectors, with risk bands ranging from one to five.

Mr Ventre says: “Mapping risk-rated funds in sectors is not an easy task and we think risks slightly missing the point.

“The industry has moved, or is starting to move away from, like-for-like performance comparison which has always been difficult in multi-asset funds. So the danger of getting too scientific with a sector analysis is that all of a sudden it becomes all about who performed the best last year. However, in practice, multi-asset funds have subtly different objectives and it’s those objectives which have led to those performance outcomes.”

Mr Onuekwusi is not convinced that risk-targeted sectors are the solution and that the only way to compare these types of funds is to “look under the bonnet and do due diligence”.

He suggests: “Risk-targeted funds have proven themselves to be the next generation of multi-asset strategies. They provide solutions for clients.”

But he adds: “The track record of risk-targeted funds typically isn’t that long, therefore they haven’t really been tested. When they will get tested, it will be when markets sell off, [or] when there is another crisis.”