A good source of information on risk-targeted funds is the Defaqto Risk-Targeted Fund study 2013. This study identified all of the risk-targeted fund ranges on the market and then assessed them against a range of criteria.
Choice characteristics
If an adviser is using risk-targeted funds across its client base, then the fund range has to demonstrate a number of characteristics in addition to pure investment performance:
• Breadth:
Is the range sufficiently broad to ensure that the temptation to shoehorn clients into a limited number is avoided? I would suggest that four funds managed to different risk levels should be a minimum, but more would be preferable.
• Activity of risk management:
Some risk-targeted funds sit in broadly constant asset allocations whereas others are more actively managed with their risk budget deployed where the managers believe they can best add value for the investor.
• Risk corridor or risk limited?:
Most of the funds within the risk-targeted sector operate within a risk band with upper or lower limits. However, some operate below the upper risk limit and adopt an approach of taking risk off the table where they feel it prudent to do so.
• Conformity to a pattern:
Does the range of funds conform to the pattern that might be expected in relation to their risk vs return? This includes the performance target of the funds becoming progressively higher as the client takes greater levels of risk.
• Consistent behaviour:
Do the funds behave in a consistent manner across the range? If there is a range of four or five funds, are they managed to clearly different risk levels and, where risk is being managed, is this done across the range?
• Fit with adviser’s proposition:
An adviser may well use multi-asset funds for a large portion, or indeed all, of the client’s portfolio. In using a multi-asset fund as a solution for a client’s portfolio the adviser still retains responsibility for reviewing the performance of the investment manager, ensuring that the investment remains suitable for the client and that the client is kept adequately informed about their investments. It is therefore extremely important for an adviser to be well informed and up-to-date regarding the investment manager’s actions and views. How well the investment manager communicates with the adviser and the extent to which support is provided by the investment manager in terms of briefing, reporting and other communication can be important factors in assisting the adviser in his relationship with the client.
Steps for advisers
So what steps should an adviser take when looking to select a fund that is managed to align with the level of risk that they have identified for their client?
