• Risk-adjusted performance is used to provide a measure of relative performance, using the average Sharpe ratio of the family of funds. It shows how much return has been provided for the risk taken. It is calculated using returns against the average performance of all the funds in the risk targeted universe
Other things to look at would be typical to funds generally:
• Fund size: It is generally accepted that most funds are not particularly profitable or comfortably sustainable until they reach a certain critical mass. Aggregating assetsunder management of each member in a family, gives an indication of whether the range is likely to be sustainable.
Of course, larger fund groups may not be in any immediate commercial pressure to close unviable families. Costs may also be subsidised for a limited period of time before they are left to find their own level based upon fund scale and economies
• Number of funds in the family: For advisers, a greater number of funds in a family can provide more choice. More funds also mean that advisers can be more granular in providing client solutions. For those advisers with a highly segmented client base, a greater number may be more appropriate
• Manager tenure: A feature of many successful offerings is longevity of people. Most fund groups tend to promote their proposition in terms of people, process and performance for a reason. And so by having a stable application of a stated investment process by the same people produces performance, or rather delivers what was mandated.
• Total cost: As with any potential purchase, it is important to know how much and for what you arepaying. It is important to know how much you are willing to pay your investment professional on an ongoing basis and what benefits you are receiving from them.
Although, non-Ucits retail schemes (Nurs) are not obliged to quote Markets in Financial Instruments Directive mandated Ongoing Charge Figures and have to been shown in the Key Investor Information Document, showing the Total Expense Ratios instead, more and more are, in keeping with the vast majority of Ucits funds out there.
What the future holds
Risk-targeted funds have emerged as an increasingly used investment solution since they should offer investors access to solutions to manage and meet client expectations and attitude to investment risk, in a disciplined, well resourced, process-driven way.
In this context, it is worth remembering that ‘risk-targeted’ funds differ significantly from what many currently refer to as ‘risk rated’.
What ‘risk rated’ actually means is that a fund has been assigned a rating – possibly aligned to one of the many risk profiling tools in the market – but this is really only part of the story and indeed only part of assessing the suitability of a fund for a client. Advisers should go a lot further than this, taking into account other factors such as a client’s capacity for loss and their required return.
