Some of the industry press coverage of multi-asset funds fails to clearly differentiate between a fund that carries a basic risk rating and a fund that actively targets risk. With an ever increasing regulatory focus on client suitability, it's more important than ever for advisers and the press to clearly differentiate between the two.
Risk rating vs. risk targeting
Any fund can receive a 'risk rating' from an independent risk profiling agency. However, very few funds have an explicit mandate to maintain this rating. Normally, funds have other targets, such as outperforming a benchmark. Over time, they can succeed or fail in meeting this target, but either way, they can, and often do, drift away from their original risk rating. This poses a challenge for advisers who must continually reassess whether the fund remains suitable for a given client's risk profile.
'Risk-targeted' funds aim to match a specific risk profile over time, while delivering strong risk-adjusted returns. Doing this successfully requires the fund to adapt the asset allocation in the face of developing trends. Even as the markets cycle through bull and bear phases, the risk profile of a risk-targeted fund should remain consistent. This allows advisers to align the risk attitude of their clients to the funds' and hopefully avoid any nasty surprises.
Risk targeting: Solving the suitability dilemma
Risk-targeted multi-asset funds represent the next generation of multi-asset investment solutions, and it's no surprise that they continue to grow in number and AUM. If these funds succeed in being consistent with specific risk profiles, the adviser and their client will both have peace of mind that, as long as the client's attitude to risk doesn't change, the funds should remain suitable.
|Asset allocation name||Attitude to Risk||Risk Rating|
|Multi-Index 3||Moderately Cautious||2.7|
|Multi-Index 6||Moderately Adventurous||4.8|
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Legal & General (Unit Trust Managers) Limited. Authorised and regulated by the Financial Conduct Authority. Q0053305. 11/15. H0157753.