In the return focused category are funds with the objective to beat the performance of a stated benchmark or peer group over time with a broad remit to achieve this objective. Management of volatility would not be the first priority.
In risk-targeted, the funds have the objective to achieve a controlled level of volatility parameters. Management of risk is the priority here. While return is always an important factor of course, in terms of priority it clearly sits behind risk management in this category.
Risk targeted always exists as a range/family with the risk taken varying across the range.
The aim of these fund families is to offer investors steady increases of risk and return. The investment team and process are usually consistent across all the funds in the family, but the asset allocation - both strategic and tactical –will vary for each fund in order to meet and adhere to the stated risk parameters.
Periodic rebalancing to ensure each fund remains within these risk parameters is also a common feature within these fund families. The measure of risk most commonly used is volatility although it needs to be acknowledged that volatility is not the only measure of risk. Fund managers will use other measures too.
Against this background of an increasing number of risk targeted fund families being launched, Defaqto has created Diamond Ratings which, for the first time, cover families of funds. Until now it has often been a challenge for many advisers and clients to compare these funds in a meaningful way.
Following on from this new split of investment styles, we see two types of business that have traditionally been separate compete head-on for the same business: fund managers and discretionary managers.
Discretionary managers now offer funds based on discretionary portfolios, whereas fund groups offer funds in a style that would have been seen as a traditional discretionary portfolio. Fund groups call these discretionary portfolio funds multi-asset funds.This further complicates an already complex area for advisers to understand.
The diagram below will help you see where the various solutions sit in relation to one another:
Fund of funds
With fund of funds, the multi asset-manager is buying and selling all or part of funds. For clients with less bespoke requirements, a ‘house’ approach can be used. This may then be tailored to take into account individual circumstances, for example a legacy capital gains tax liability. There has been an increase in the number of these services being provided. Interestingly, we are seeing the market polarised between direct propositions offered by the discretionary managers and those MPS solutions which are offered via platforms.
Directly invested
In the case of directly invested, one fund manager or team manages all the investments in the fund, investing directly into equities, bonds and other asset classes rather than buying funds run by external managers.
