How then do we use the output from these ATR profile tools to identify a suitable match with a multi-manager or fund of funds? The challenge facing advisers and their clients is to identify or perhaps have to design one that does actually manage to take on board the clients’ individual appetite for risk and reward – I suggest this is yet be achieved, if indeed it is possible to do this with a processed system driven approach rather than detailed Q&A as part of the fact-finding process. One key area of the risk conversation very close to the heart of the regulator is that of Capacity for Loss and what the client understands by this and where they sit on the curve of being aware of the potential downside and financial consequences therein.
Over reliance on risk ratings, however they are derived, can artificially skew advice and potentially ignore other key factors like active or passively run funds, underlying costs and charges, asset allocation and diversification and also the availability of access to the fund in an increasingly platform-driven marketplace.
Consider the performance over five years of five of the top performing multi-manager or fund of fund offerings in the global equities sector for example. The names have been removed to avoid the subjectivity of reading brand names rather than the performance.
| Fund manager | Five year total return |
| Fund A | 41.3% |
| Fund B | 37.8% |
| Fund C | 35.8% |
| Fund D | 34.3% |
| Fund E | 34.68% |
| Sector Average | 29.1% |
Source: Lipper. Performance up to 31 May
Were we to now apply a risk rating to these funds the picture would look like this:
| Fund manager | Five year total return | FE Risk score |
| Fund A | 41.3% | 75 |
| Fund B | 37.8 % | 86 |
| Fund C | 35.8% | 84 |
| Fund D | 34.3% | 85 |
| Fund E | 34.68 | 86 |
| Sector Average | 29.1 | 59 |
So does the added input of a risk rating actually make a compelling contribution to help advisers when selecting multi-mananger funds or indeed any funds? The use of a third party risk assessment within the due diligence of investment fund selection needs very careful consideration, otherwise I suggest that the potential for reverse engineering when designing a portfolio could create problems, particularly in relation to independence of advice.
It is worth noting when looking at the above fund returns that over the same period, while the sector average return was modest at 29.1 per cent and less than the funds shown in the tables above, the growth of the FTSE World 43.6 per cent.
