Risk-rated funds have risen in popularity in recent years as advisers seek to match their clients’ risk appetites to an all-in-one portfolio. A major driver of this was the implementation of new regulations stemming from the Retail Distribution Review (RDR), which has put advisers under a greater obligation to know their clients and ensure their advice is suitable. This has not only meant that risk profiling tools have become essential tools of the trade, but it has also meant that advisers have a dizzying number of risk-rated funds at their disposal.
At its heart, risk profiling is a measure of a client’s attitude to risk for a variety of investment decisions. Various client risk profiling services are available on the market and there is no set standard, but generally each level of risk is assigned a number between one and 10, where the lowest number represents the least amount of risk. These risk profiles then match the risk profile or risk rating of funds that have been deemed to fall within that specific risk band, making it easier for the adviser to match them to their client.
This allows an adviser to outsource the investment management process to the fund manager, freeing up time for them to focus on the full spectrum of services related to financial planning. But while these funds offer clear benefits, the distinctions between risk-rated and risk-targeted funds are often missed. So what sets each of them apart and how do they work?
APPLYING A RISK RATING
Whether they are risk-rated, risk-profiled or risk-targeted, all of these funds are given a rating from one or more of several independent agencies, one such being Dynamic Planner. A risk rating is determined based on the information on the fund at the time that it is being assessed by the rating agency. Any fund can be given a risk rating, although most are mixed-asset funds that use multi-asset or multi-manager strategies. More frequently than not, funds that lie in the Investment Association Mixed Investment sectors are given risk ratings because of their broad objective of delivering returns for a specific risk appetite.
When a fund is given a risk rating, it is based purely on the amount of risk that was measured in the fund at a specific point in time. Because of this, a fund that is simply risk-rated or risk-profiled gives the manager a great deal of flexibility to implement their preferred investment strategy as they seek to generate the best possible returns. On the positive, these funds are generally designed to outperform their benchmark within asset allocation limits, but it also means that they do not have an obligation to adhere to a specific risk band. Therefore there is the possibility that a fund’s risk level could change, causing it to drift into a different risk profile. Should this happen, the fund could be given a new risk rating – higher or lower – the next time it is reviewed by a risk rating agency. For funds of this type, a financial adviser will need to monitor risk-rated funds at regular intervals and ensure that they continue to align with a client’s objectives and risk appetite.
HOW RISK-TARGETED FUNDS DIFFER
One way to avoid the potential problem of recommending a fund that could shift risk profiles is to find one that is risk-targeted. While all funds that have been given a basic risk rating can be described as risk-profiled or risk-rated, only a specific type of fund is known as risk-targeted. These funds are designed to stick to a specific volatility band. Therefore the level of risk in the portfolio will not exceed or fall below specific thresholds over the long term.
Much like other risk-rated funds, those that are risk-targeted take the form of a multi-asset portfolio that can serve as a one-stop-shop portfolio solution for the client. The only difference here is that, while standard risk-rated funds have the primary objective of delivering the best possible return within their constraints, a risk-targeted fund is focused on delivering the best possible return within a specific risk band. A key benefit of a risk-targeted fund over a standard risk-profiled fund is the fact that, as a result of its aim to maintain a consistent volatility level, it helps to ensure ongoing suitability and will mitigate the likelihood of unwanted outcomes for clients.
HOW OUR FUNDS ARE DIFFERENT
The CF Canlife Portfolio Funds offered by Canada Life Investments are risk-target managed funds of funds that are strictly aligned to the asset allocation models set by Dynamic Planner, corresponding to risk profiles three to seven. As risk-target managed funds, they are designed to stay within a specific volatility range and do not have any tactical tilt applied on top. We believe that this results in a better outcome for investors.
Simply put, if a fund is labelled a Dynamic Planner risk profile 3, it should stay at risk profile 3. This commitment to adhering to specific asset allocation models means that the funds stay within their risk profile boundaries and can therefore use the Dynamic Planner Risk Target Managed badge. While the Portfolio Funds themselves are not actively managed, this does not mean that the funds cannot outperform. Because Canada Life Investments invests primarily in funds from our ‘in-house’ fund range for the Portfolio Funds, they benefit from experienced managers with long-term track records in fixed income, equity and property who can tailor their portfolios to suit prevailing market conditions.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
The information contained in this document is provided for use by professional advisers and is not for onward distribution to, or to be relied upon by, private investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. This document is issued for information only by Canada Life Investments. This document is intended to be used as a sales aid and does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.
The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice.
The funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective.
IA sector information: CF Canlife Portfolio III Fund in IA Mixed Investment 0-35% Shares, CF Canlife Portfolio IV Fund in IA Mixed Investment 20-60% Shares, CF Canlife Portfolio V Fund in IA Mixed Investment 40-85% Shares, CF Canlife Portfolio VI Fund in IA Mixed Investment 40-85% Shares, CF Canlife Portfolio VII Fund in IA Flexible Investment. ABI sector information: Canlife Portfolio 3 Fund in ABI Mixed Investment 0-35% Shares, Canlife Portfolio 4 Fund in ABI Mixed Investment 20-60% Shares, Canlife Portfolio 5 Fund in ABI Mixed Investment 40-85% Shares, Canlife Portfolio 6 Fund in ABI Mixed Investment 40-85% Shares, Canlife Portfolio 7 Fund in ABI Flexible Investment.
CLI00662 Expiry 22 August 2017