Risk bound fund families can be a simple and effective solution for client and adviser: new Defaqto case study

19 April 2017

In recent years, with the market volatility we have seen, there has been a shift in an investor’s primary focus from being on return to now being on risk.

Financial information business Defaqto has released a case study as part of their publications range, sponsored by Prudential, that takes a closer look at the multi-asset funds universe and in particular risk bound funds.

These funds exist as ‘families’ - normally 4 or 5 funds run by the same fund management team and following the same investment process but with expected return and risk for each fund increasing across the family. Risk bound funds aim to maintain a risk level, or match a specific profile, over time. Doing this successfully requires the fund to adapt to market movements by adjusting the asset allocation. Even with the volatility of the market the risk profile of a risk bound fund should remain fairly consistent, enabling advisers to align the risk attitude of their clients to the funds.

For the investor the benefit of these types of funds is the simplicity of them, as it is possible for a client to invest in the same family of funds throughout their investment lifecycle - younger investors in the accumulation phase would be expected to use the higher risk funds in the family, with their corresponding higher levels of expected return; while older investors approaching retirement or already in the decumulation phase will tend to use the lower risk funds, accepting their probable lower expected returns.

For the adviser the benefit is that there is a reduced amount of due diligence to carry out in terms of finding a new proposition, as the majority of work will have been done at the start when researching the market and selecting the family.

However, there can be significant differences in structure, process and other features across the various risk bound fund families in the market, so due diligence is still very important and funds still need to be regularly monitored.

A comprehensive advice system that enables a joined-up approach for the adviser can support them when considering potential client solutions. It should include a risk profiling tool linked accurately with the risk levels, mappings of funds and model portfolios. Information across a wide range of funds and products enables the adviser to deliver a thorough comparison between existing and proposed solutions demonstrating the real value of advice to clients.

Pan Andreas, Head of Insight and Consulting for Funds and DFM at Defaqto, comments:
“Defaqto’s Risk Ratings allow risk bound funds to be assessed in terms of their risk and hence suitability for the client. The fund’s risk rating, based on both its past and expected volatility, can be matched to the client’s likely risk profile if they have completed an attitude to risk questionnaire.

“Defaqto’s Diamond Ratings can act as a framework for research into and selection of risk bound fund families. Our rating methodology, on a scale of 1 to 5, shows where each family sits within the risk bound universe on the basis of our criteria as well as providing a good indication of those families that have broadly delivered on their objectives.

“The ratings are available to view and use with within our research software solution for advisers, Engage. Engage helps advisers manage their financial planning process all in one place, allowing advisers to meet their differing clients’ needs efficiently and their firms’ preferred financial planning process as well as providing all the necessary documentation to ensure that they are delivering compliant advice.“

Catriona McInally, investment expert at Prudential, commented:

“Demand for cost-effective multi-asset funds is high as investors understand more and more that costs will detract from performance.

“As well as providing an overview of multi-asset and risk bound funds, this guide aims to explain how these types of funds can fit into an adviser’s proposition and demonstrate how investment strategies can be altered to meet a client’s changing circumstances.

“Also covered is Prudential’s range of collective funds, which is managed by in-house investment experts (PPMG) and available to advisers on most fund platforms, making this guide a source of important due diligence information for advisers who are recommending these funds to their clients.”

Download Defaqto’s new case study from the Resources section on their website defaqto.com/advisers/resources/publications-list/dynamic-and-dynamic-focused-fund-ranges/