The post-financial crisis fixation with emphasising risk at the forefront of advice discussion has brought about something of a quiet revolution in the way retail funds are managed and marketed.
The IMA’s introduction of its mixed asset sectors (0-35% Shares, 20-60% Shares, 40-85% Shares and Flexible Investment) in early 2012 was met with a few grumbles, but has generally been well received by fund groups and fund pickers alike.
It is debatable whether distinguishing between the multi-manager and multi-asset labels really reveals much beyond a different approach to marketing, but in September 2012 financial research think tank Defaqto published one of the first papers singling out the emergence of a new breed of risk-targeted funds as a definable trend.
Battle of the bands
“Risk-targeted funds aim to maximise returns to investors but within pre-defined volatility bands,” the definition read.
“Simply put, the managers will seek to maximise returns to investors but can only take on so much risk, as defined by volatility, within their funds.”
A number of big name fund groups have since successfully launched ranges into this space, including Standard Life Investments (SLI) MyFolio, Allianz RiskMaster, BlackRock Managed Volatility I-III, and F&C Lifestyle. The Likes of Seven IM, Architas and Margetts have also introduced portfolios for their clients.
But how does an adviser, or potential end client, chose between the different options, and should wealth managers look to market their own portfolios this way?
Defaqto has created its own Diamond Ratings for the funds and Patrick Norwood, insight funds analyst at, sets out a number of key attributes which separate out the best available options.
He explains: “Is it a stable, strong business? How big is the team? How experienced are they and what’s the quality of the staff like? We then look at the investment process – what’s their underlying philosophy and how do they go about implementing ideas?
“They normally have their strategic asset allocation decided, and then build a tactical allocation around that dependent on markets and economies. Also, we look at how they go about selecting managers; who have they chosen and why, and who have they got rid of?”
Restricting the upside
Risk-targeted funds are rated on performance and risk shape, though given the relative youth of most of these funds, determining a long-term track record can prove difficult. Still Norwood points out that in the long term, investors may also be giving up some outperformance: “A return-focused fund may go where it wants without controls. Risk-targeted constrains that so you may have less falls – you are less likely to do badly – but you also restrict the upside as well.”
Any wealth managers looking to introduce risk-targeted or risk-rated vehicles in to what is already a crowded market marketplace may want to spend some time looking ahead to the next stage of product evolution, which according to Seven IM’s Justin Urquhart Stewart may be age-related.
He says: “We are looking at a different variation to ensure that funds will adjust over time with people’s age. Although we’ve been riding the multi-manager road, age-related approach going to be increasingly important for the high volume, low value auto-enrolment pension funds.”
“Things can change radically. Go back to 2000, and multi-asset was a strange new area as people had property, cash, fixed interest and equities and it was relatively simple and there were few funds. Now we have 10 or 12 asset classes and the use of passives. Quality of fund structures are much better than they used to be, but will we get costs down?”
A more in depth look into risk-targeted and risk-rated funds will feature in the October edition of Portfolio Adviser, out now.
