It is the latter which is arguably the best served in the market and an important and fast-growing sub-group of this outcome, catering for investors who are seeking growth, is risk targeted funds.
Risk targeted funds, as the name suggests, are funds designed specifically to target a level (or range) of risk, usually over the long term. Risk can be defined in a variety of ways including realised (past) or forecasted (future), volatility (upside and downside) or drawdown (just downside) as well as absolute or relative. Irrespective of the metric used to define risk, it will drive the make-up of funds and hence will ultimately influence not just returns but the overall investment journey. During our research into this area of the market we have identified numerous different approaches and styles of managing risk-targeted funds. Whilst we are largely agnostic on the approach taken by managers, we believe it is vitally important to understand exactly how a fund is being managed, as two funds targeting a seemingly similar level of risk could behave very differently, particularly over shorter time periods.
Risk targeted funds have grown in popularity over the last few years, with the poor outcomes and unexpected levels of risk experienced by investors during the financial crisis adding to their popularity. At the same time, investors have started to shift away from a reliance on peer groups and the change in the regulatory environment has forced advisors to reconsider the way that they look at funds. A risk targeted approach not only makes it easier to satisfy regulatory requirements, but can potentially also provide business efficiencies. Additionally they help advisors by offering a choice of funds which meet different risk profiles but which use a common investment approach.