Investment experts have warned that new European regulation around risk ratings could force investors away from middle-ground funds and result in a build-up of misunderstood risk in their investment portfolios.
The EU’s committee of European securities regulators is looking to introduce a new two-page document which adv-isers must present to clients from July 2012, called key investor information.
The rules would require all EU member states to use five-year historic volatility figures as a basis to create numerical risk categories for funds, from one at the lowest end of the risk scale to seven at the highest.
IMA research claims that under the current terms, 85 per cent of UK funds would be risk rated five or six.
L&G Investments managing director Simon Ellis says: “The concern is that investors will abandon the middle ground, which may be most suitable for them, driven by fear into the lowest-returning parts of the market.
“Sectors such as cautious managed or balanced could become isolated under this new regime despite the fact that most investing clients need to take on more risk if they are to achieve their long term goals.”
Martin Currie head of product development Toby Hogbin says: “The real risk is that instead of understanding portfolios, investors will simply follow the risk number, which is not going to be the perfect answer. This will result in a build-up of misunderstood risk in a portfolio. I do not think there will be a middle ground of funds, given the result of these risk ratings.”
Skerritt Consultants head of investments Andrew Merricks says: “Using five-year historic volatility figures is a flawed option, given what has happened in that time. It could see investors with a low-risk profile in higher-risk products and vice-versa.”