Investments  

Matching a fund to the risk profile of a client 

This article is part of
Guide to picking a fund

This comes from providers being required to place a risk number of between one and six on their fund, with one being the least risky and six being the most risky.

The measure required by regulators links the definition of volatility to risk, in a way that Mr Farlow thinks is a problem.

Charlie Parker, managing director at Abermarle Street Partners, a discretionary fund house, also highlights that mistaking volatility for risk is a major mistake made by fund buyers.

He says: “Up until three weeks ago, you could have looked at the IA Sterling Corporate Bond sector and thought it had no volatility at all and so is low risk.

"Then a few days ago it fell 4 per cent in a day.

"My view is you can’t really align the risk of a fund with a client’s level of risk, you have to do it at the portfolio level, where there is a greater balance between asset allocation and investment styles.”

Model portfolio services

Regulatory changes have led to a wider focus on costs and placed extra time pressures on advisers. 

This has led to an increase in the number of advisers using “one stop shop” investment solutions, such as model portfolio services or discretionary fund management providers. 

Ben Seager-Scott, head of multi-asset funds at wealth manager Tilney says: “If you’re going for a one-stop shop, such as a multi-asset fund, I’d suggest looking at the expected return profile of the fund with a close eye on metrics such as expected volatility and see whether these are in line with the client’s parameters.

"I’d also suggest looking at the asset allocation within the fund to identify the levels invested in relative high or low risk asset classes.

"If building a portfolio of single-strategy funds, I’d say it’s important to take a look at the portfolio overall, and that the mix in aggregate follows the same points as above.”

Tom Sparke, investment director at GDIM, a discretionary fund management firm in Cambridge, says he generally tries to combine what he thinks are higher risk funds with those that have a lower risk profile, in order to create a balance, with the end client then placed into the portfolio that most closely matches their objectives. 

He says that among the characteristics he examines to determine the risk level of a particular fund include the propensity of the fund to fall when the market falls, and the extent to which the fall matches, or exceeds, that of the market as a whole. 

Ben Willis, who runs the model portfolio service at advice firm Chase De Vere says: “Unless it is a multi-asset or multi-manager fund, such as one that will sit within the IA Mixed sectors, then we wouldn’t allocate just one fund to a client.