View more on these topics

Asset managers urged to act over misleading risk ratings on funds

Fund houses have been urged to ease investors’ concerns over anomalies discovered in risk ratings on popular funds.

Since the implementation of European regulations such as Priips on 3 January, fund management companies have been updating the key information documents of their funds with new calculations on risk, volatility and performance.

However, confusion continues on some funds, such as the Patient Capital Trust at Woodford Investment Management, where the risk ratings appear lower than they should be, according to many commentators.

The trust’s authorised fund manager, Link Asset Services, has rated the trust with a ‘Summary Risk Indicator’ of 3 out of 7, which appears in the fund’s KID.

But other risk rating agencies, such as Dynamic Planner, agree the rating might be incorrect.

Dynamic Planner agrees with advisers that the risk level calculated by the agency is too low and attributes the anomaly to Priips and the way the new calculations work.

Dynamic Planner head of asset and risk modelling Abhimanyu Chatterjee says the firm does not rate the Woodford trust but when it does it might increase its risk level.

Thameside Financial Planning director Tom Kean says: “It’s a problem for us as the risk rating is wrong by any sensible measure.”

According to broker Numis, the risk indicator relies too heavily on historic volatility of a fund’s share price rather than the nature of the underlying assets. Numis notes that equity funds with risk indicators of 3, which is medium low risk, also include products from Artemis Alpha, Aurora, European Assets, and Herald.

In contrast, some funds with more defensive mandates carry a rating of 4, while Lindsell Train Investment Trust is rated 5. The three UK micro-cap funds run by Downing, Miton and R&M all have a rating of 3, whereas the companies’ UK Smaller Company funds have a rating of 4.

A Woodford spokesman says the firm is aware of the criticism around the new regulations and has “engaged with industry working groups on the subject”.

He says: “We have always been, and continue to be, very open and transparent in our regular communications on the risk profile of the Woodford Patient Capital Trust to ensure investors fully understand its investment objective and the journey they should expect.”

Association of Investment Companies chief executive Ian Sayers says there are many KIDs that now show a risk indicator of 3 and in some cases 2, which indicates a low risk.

According to Sayer, the narrative that has to go alongside the risk figure in KIDs also suggests to consumers that the funds are unlikely to lose money if markets are unstable. “We will present evidence to Europe to support our call for a complete overhaul of these rules,” he says.

Embark Group chief investment officer Peter Toogood says the misallocation of risk bands on funds is not new and that volatility bands have always been set “too broadly”.

Quantitative easing, which caused a drop-in asset price volatility, was also a reason for risk dispersion, he says.

Toogood argues that volatility bands are not the main factor to consider in fund selection, citing how mortgage-backed securities looked conservative from the outside in 2008 until they halved in value in the financial crisis.

He says: “With the latest FCA market study, fund managers will have to bring much more clarity as to the objective of the fund, what type of investment journey an investor can anticipate and indeed how the fund represents value for money for clients. These inputs therefore need to be considered alongside the KID rating and the Priips.

“Most fund managers have product governance committees responsible for such matters and their role is becoming more important. As in all cases, the level of scrutiny when analysing a fund needs to be rigorous and all-encompassing.”

The Baillie Gifford board has been battling the FCA since January over concerns with the new Priips rules.

James Anderson, the manager of the £6.5bn Scottish Mortgage Investment Trust, the sector’s second biggest investment trust, says the firm is “extremely disturbed” by the requirements of the KID, especially on past performance data.

“We consider the most important risks in markets to be intrinsically unpredictable and unmeasurable”, he says. “We would also highlight that the emphasis on the short-run demanded in the KID seems to us to be acutely misguided. We continue to stress to retail shareholders that we focus, as we believe they do, on building capital in the long term. We believe an undue preoccupation with short-term volatility undermines this commitment – and indeed the ultimate purpose of financial markets”.

A Link Asset Services spokesman says: “We are confident the key information document meets the FCA’s requirements of being accurate, fair, clear and not misleading and that the information in the KID has been calculated in strict adherence to the rules set out in the Priips Regulatory Technical Standards.”



Dynamic Planner adapts risk tools to meet Mifid II demands

Risk profiling and financial planning tool Dynamic Planner has redesigned its risk assessment questionnaire to better meet Mifid II requirements around suitability. The process, which was launched at the firm’s annual conference on Wednesday (31 January), will now include 15 psychometric attitude to risk questions and will focus less on people’s general understanding of finance. […]

Lloyds hits back at Standard Life in spat over assets

Lloyds has questioned Standard Life Aberdeen’s credibility as it defends its decision to move £109bn of assets away from the fund giant. In February, the Scottish Widows Investment Partnership assets were pulled because Lloyds saw Standard Life as a rival. However, this morning Standard Life Aberdeen announced it and Lloyds are in dispute resolution over the legal […]

Is this the endgame for the current mergers & acquisitions boom?

Last year, worldwide mergers and acquisitions (M&A) rose to an unprecedented $4.7tn, according to Thomson Reuters, a 41 per cent increase over 2014. Anthony Forcione, senior equity analyst at Loomis Sayles, an affiliate of Natixis Global Asset Management, looks at what’s been driving this particular wave of mergers. Click here to view full article: Loomis-Sayles


News and expert analysis straight to your inbox

Sign up


    Leave a comment