Risk rating is considered a ‘backward-looking’ measure of risk, or how volatile the fund has been historically. Unlike risk-targeted funds, it is not a risk level being targeted by the manager.
There is a growing appetite for risk-targeted portfolios thanks to the trend for outcome-based investing, whereby advisers invest their clients’ money based on defined outcomes over set periods.
The appeal of these funds is obvious, with most risk-targeted portfolios suitable for those with a more cautious view of risk, or investors who perhaps have a longer investing time horizon and want to take more risks.
Mike Webb, chief executive of Rathbone Unit Trust Management, explains: “Risk-rated vehicles give a snapshot of the risk attributed to a fund, which is then matched to a client’s risk level. They’re not prepared to predict the movement of asset classes or global markets.
“Risk-targeted or outcome-orientated funds are completely different because they target an explicit level of risk, which both investor and manager assume. They do not guarantee that money cannot be lost, but given that we are forecasting volatile markets ahead, are advisers exposing themselves to more challenges by using a backward-looking model in risk-rated funds?”
Asset managers have been flooding the market with risk-targeted portfolios in a bid to capture this trend for more certainty over the level of risk being taken by investors.
Legal & General Investment Managers (Lgim) launched another risk-targeted multi-asset range in October this year, having already established its Lgim Multi-Index range a couple of years ago.
The Lgim Multi-Index Income 4, 5 and 6 funds, as the name suggests, seek to generate an income while maintaining prescribed levels of risk.
As Justin Onuekwusi, lead fund manager of the Multi-Index Income fund range, suggests: “In this low interest rate world, the industry has seen increasing demand for multi-asset income funds targeting high-yield levels. However, there are clear dangers that come with chasing income. It may not be sustainable or may force a change in a fund’s risk profile in order to meet yield targets.”
Research by Aviva Investors this year found the ability to offer a sustainable, regular income was reported by private investors as “the single most important requirement from advisers”. Yet six out of 10 investors were not prepared to accept a higher level of risk in order to achieve this, the survey showed.
For these types of investors, risk-targeted portfolios would seem to offer the perfect solution.
As Mr Webb notes: “We believe a risk-targeted/outcome-orientated tool is more powerful in the long term as a means of meeting investor objectives, than a fund that is potentially driven by targeting top-quartile returns without specific consideration for risk levels.”
F&C MM Lifestyle Funds
Rob Burdett, Gary Potter and Kelly Prior are part of an eight-strong multi-manager team that runs this range of five funds designed to suit a specific attitude to risk. They are named ‘Balanced’, ‘Cautious’, ‘Foundation’, ‘Defensive’ and ‘Growth’. The funds invest across equities, cash, property and bonds through both actively managed funds and passive investments, such as exchange-traded funds. This fund-of-funds approach allows the team to invest in between 25 and 40 funds.
Aviva Investors Multi-Asset Funds
This range, co-managed by Peter Fitzgerald and Nick Samouilhan, comprises five portfolios – from the most cautious £56m Multi-Asset I fund up to the riskiest £43m Multi-Asset V. The funds aim to provide a level of risk that is consistent with a predefined objective over any three-year period. The managers invest across a blend of global asset classes, including equities, commodities, property and fixed income.
Rathbone Multi-Asset Portfolios
David Coombs, assisted by Will McIntosh-Whyte, is the lead manager of the Strategic Growth, Total Return and Enhanced Growth vehicles in this range of portfolios. In October Rathbones also added Strategic Income to this range. The pair run the funds with the aim of delivering specified levels of volatility, while “targeting a reasonable return for the risk taken”. Risk is reduced by investing across asset classes, so the newly launched Strategic Income portfolio seeks to generate a long-term total return of consumer price index-plus 3-5 per cent over a minimum five-year period, subject to a targeted annual minimum yield of 3 per cent.