Apollo Multi-Asset Management says it would prefer the Investment Management Association managed sectors to be based on volatility and how much fund prices decline from their last peak, or drawdown, rather than how much is held in equities and bonds.
The firm supports the IMA’s review of the managed sectors in recognising some cautious funds have not been that cautious and some balanced funds not that balanced, with up to 85 per cent in one asset class.
But it feels defining sectors by imposing a maximum for assets such as equities and a minimum for assets such as bonds is too vague. The firm points out some equities such as utility companies are lower risk than others such as mining stocks while bonds are not necessarily lower risk in the current climate.
Analysing five-year data for the IMA cautious sector, Apollo says there are 80 funds which have higher annualised volatility and a greater decline from peak to trough than the FTSE 100.
Annualised returns from these funds range from a 1.57 per cent negative return to 9.84 per cent positive return.
Apollo, which moved all its funds to the IMA unclassified sector in June, says its analysis shows the current sector limits for equities and bonds are fairly pointless as they do not keep volatility within a narrow range.
Fund manager Steve Brann says: “We think the only way to fairly assess and categorise a fund is to look at what it delivers to investors in terms of risk and that the simplest, albeit not perfect way, is to look at volatility. We understand the IMA does not want to take the role of the IFA in choosing the pool of appropriate funds for the end investor but the current wide parameters mean that advisers are comparing apples with oranges.We believe advisers should be comparing on a range of statistics or ratios such as funds with similar bands of annualised volatility, maximum drawdown and annual returns.”