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DFMs hit back at concerns over model portfolio branding

The world of investment is filled with jargon, which can pose a barrier to entry for the layman.

While it is part of the financial adviser’s job to do some jargon-busting for their clients, they might find it difficult, as some investment solutions still have nebulous definitions, running the risk of comparing apples with oranges.

Earlier this year, the FCA looked at naming conventions of model portfolios and ruled that labels commonly used to describe the risk associated with them, such as “cautious”, “balanced” and “adventurous”, can actually refer to significantly different risk levels across different providers.

The industry, however, has not radically overhauled the way it brands model portfolios yet.

Brewin Dolphin divisional director and quantitative analyst David Hood says it still uses labels the FCA might consider misleading because the investment manager also employs Distribution Technology’s risk-rating scale of one to nine to describe individuals’ portfolios. According to Hood, this provides a clear determinator of risk involved, since Brewin’s managed portfolios are offered strictly through intermediaries, who are well versed in DT’s ratings.

Similarly, Hargreaves Lansdown suggests disclosing a variety of risk-related data is key.

Hargreaves financial planner Danny Cox says: “Risk is in the eye of the beholder and therefore we provide a range of measures to help investors with their decisions, including easy access to factsheets, key investor information documents, and performance against benchmark and cash.”

Tatton Asset Management head of communications Roddi Vaughan-Thomas says the firm has not considered changing the names of its managed portfolios in the wake of FCA criticism, because the products cater to advisers, and these are the names that financial planners are comfortable using with their clients. Some discretionary fund managers have pointed out that despite the unwelcome spotlight the FCA’s report shone on them, loosely used labels are not a problem exclusive to the investment industry.

Seven Investment Management head of compliance David Ogden says: “The issues raised in the FCA platform paper are important, but not unique to model portfolios, but across the funds universe also.”

He adds: “A lot of funds, as well as model portfolios, come with words like ‘cautious’, ‘adventurous’ or ‘balanced’ in their name.

“But different groups have different interpretations of what these mean, so advisers and investors need to make sure what’s on the tin is aligned with what they want inside it.

“It is good to see the FCA pick up on the issue, but it is not something that can be dealt with in isolation. It is not an issue that is in any way unique to model portfolios.”

Ogden gives the example of funds in the Mixed Investment 20-60 per cent Shares sector, some of which can find themselves towards the top of the equity range, with others nearer the bottom. He says: “Many of the funds have ‘cautious’ labels, others ‘balanced’. If you have a fund which is towards the top of the equity range, this will drive returns, but also the volatility.

“This is because even in a portfolio with a 50:50 bond to equity split, around 85 per cent of the volatility will historically have come from the equity component.”

He points out that in a search for a genuinely cautious fund, investors might want to look in the 0-35 per cent equity sector instead. But regardless of the investment product in question, looking behind the label is always key. Ogden says: “What you definitely need to do, whether it is model portfolios or funds, is lift the lid to make sure the label matches the risk profile.”

The regulator’s work on labels has inspired some companies to rebaptise their funds. Asset manager Janus Henderson took a proactive approach and assessed the naming of its funds.

This process saw, for example, the firm’s Global Care Growth portfolios become Global Sustainable Equity.

Head of investment trust marketing Simon Longfellow says: “The original names were tested with consumers who were unsure of the exact meanings, so we amended them, and we were also aware of the work of the regulator in this respect.”

The wider “growth” label that was removed from some of Janus’s portfolios has been a particular target of criticism for some industry figures recently.

For instance, Blue Whale Capital chief investment officer Stephen Yiu has criticised “growth” and “value” labels to describe investment styles as “misleading”.

Yiu says: “The question that we get all the time is, ‘so you are a growth manager then?’ And then we are trying to say that we are not. But how do you define that?”

Yiu sees the industry’s use of “growth” versus “value” labels as being irrational, since “value” suggests buying undervalued stocks which should be surely desirable for all investors, just as they should be investing in companies that are expected to grow.

However, he does not believe that it is up to the regulator to crack down on potentially unclear labels, and sees an answer in increasing market knowledge among consumers and the industry.

He says: “I think it is not the regulator’s job. Market knowledge should grow over time.

“Fund and wealth managers, and advisers need to step up and understand a bit more.”



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