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Lowes’ Bell voices concerns at Skandia risk-rating stance

Lowes Financial Management has warned that Skandia’s stance on risk-rating funds could lead to “significant capital losses” by exposing clients to areas with unsustainable yield levels.

LFM investment manager Melvyn Bell says ranking risk on a scale of 1-10 fails to take market cycles into account.

He says: “The net effect of the Skandia risk ratings, assuming level five is medium risk, will see lower-risk investors funnelled towards property, cash deposits and gilt funds to offset the high-risk equity exposure.”

Bell says Skandia’s spectrum 3 fund has a 17.6 per cent holding in the BlackRock UK gilts fund.

He says: “In the last three years, this fund has benefited from falling yields as investors sought a safe haven from a feared economic collapse. However, many believe we are at a point where the yields are at unsustainable levels and could sustain significant capital losses if interest rates revert to more normal levels.”

The remarks come after Money Marketing reported on Skandia research claiming that IFAs’ ratings of risk in balanced managed funds were lower than ratings assigned under its own analysis.

Skandia investment marketing head Graham Bentley says: “Melvyn’s point about funnelling lower-risk investors into gilts may not include the net effect of the risk rating. Skandia’s asset allocation tools do not optimise at fund level but at asset class level and based on prospective, not historic, longer-term volatilities.”

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  1. Neil F Liversidge 5th November 2010 at 6:31 pm

    I could not agree more. This is the problem with all computer-driven asset allocation models. The allocations they throw up for a given input will usually be the same for an input done this year, last year, five years or ten years ago. For that reason we only use them as a base and then apply a ‘reality overlay’ which takes account of what is happening in the real world. That overlay is not driven by any computer but is the product of thirty years’ experience and all the study I did before that and have done since, most of which won’t get many any diploma points but which has nevertheless got me an awful lot of very happy clients. I suspect the same is true for most experienced investment advisers. If the FSA succeeeds in hassling them all out of the industry of course, clients will then be at the mercy of the highly qualified but inexperienced slaves to technology!

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