Regulatory pressures on advisers to ensure investment recommendations are suitable for clients, particularly from a risk point of view, has resulted in a number of risk-rated, risk-targeted and risk-managed solutions appearing on the market.
But is there actually a difference between these strategies?
In essence, a fund that is risk-rated either through the Synthetic Risk Reward Indicator (SRRI) on key investor information documents (Kiids) or through an independent risk profiler has a rating based on a specific point in time.
Meanwhile a risk-targeted or risk-managed fund has the specific objective of targeting a certain level of volatility or range and actively manages the fund to meet that level.
Justin Onuekwusi, fund manager at Legal & General Investment Management, admits: “I get a bit of a bugbear about people thinking risk-rated and risk-targeted are the same because they have risk in the name. You wouldn’t think absolute return and relative return are the same.”
He adds: “The key point with a risk-rated fund is because they’re not targeting that level of risk, they’re targeting something else like income or return, then that risk can drift over time. That is not to say they’re not fit for purpose, just that the adviser has to be aware that if they’ve gone through an attitude to risk (ATR) questionnaire and aligned the fund with a client they have to be aware of the drift, which puts the onus on the adviser.”
Peter Fitzgerald, head of multi-asset at Aviva Investors, agrees the primary difference between risk-targeted and risk-rated funds is the former has a very explicit mandate to ensure a primary investment objective that risk remains between a certain band.
He notes: “My belief is a lot of this has been driven by regulatory change to try and ensure that clients have portfolios where they understand how the returns should behave over time.”
Simon Evan-Cook, senior investment manager at Premier Asset Management, suggests that risk-targeted investing is very much about trying to deliver an outcome for clients. “We are very conscious that advisers who use them want to achieve a certain level of volatility for their clients,” he says.
“They’ve risk-rated them and put them into their relevant risk buckets and that to them is the most important thing. It works very well for a select band of advisers that have set up their business that way. “
Iain Mcleod, investment director and multi-asset product specialist at Standard Life Investments, adds: “Virtually all funds will have a risk rating, all funds in the UK have to have an SRRI, which is on a scale of one to seven. That is a good example of risk rating, it’s a point in time and everyone is getting compared on exactly the same basis. What a risk rating like that doesn’t tell you is what the intention of the fund was, let alone what it is going forward.”
