We are in continuous dialogue with advisory businesses and they have told us that they require an independent assessment of the fund family arena as well as the fund universe. And, of course, for compliance reasons, such an assessment has to look at the whole market across the sectors covered.
In response to this, we launched our comprehensive Defaqto Diamond Ratings.
Diamond Ratings will help you segment the funds available in each sector because they indicate, at a glance, where for example Risk Targeted Fund Families or Multi-Asset Funds sit in the market based on both performance and a range of key qualitative attributes.
In summary, Defaqto Diamond Ratings:
- Are a natural evolution of our established research into managed funds and renowned consultancy activity
- Are whole of market across the sectors they cover
- Uniquely rate families of funds to give advisers an insight as to whether the intended gradations of risk and return have been delivered
- Combine a quantitative assessment of both performance and numerous other data points, including manager tenure, assets under management, costs and distribution
- Are backed by Defaqto’s established and independent brand
Diamond Ratings are now available, in full, within our research software for advisers - Engage - enabling you to compare a shortlist of funds and fund families, and to research the market generally.
How do Diamond Ratings benefit advisers?
Diamond Ratings help advisers, and their clients, see at a glance where a fund or fund family sits in the market and, therefore, make it much easier to segment the propositions available in this sector.
Uniquely, Defaqto Diamond Ratings support your research into fund families.
Choosing particular fund families rather than matching funds from many different providers to your clients’ risk profile should make your proposition more consistent and flexible at the same time. When you or your client wish to swap funds, this is much easier within a fund family rather than moving from one provider to another. Further, if you use a number of funds from a smaller number of providers, you may also have more power to negotiate better client terms.
However, comparing funds on this basis is complex. At the start of 2015 there were 84 fund families in the market tracked by Defaqto, consisting of 342 individual funds and this number is still expected to increase. Performing initial and ongoing due diligence on all families is extremely complex and time consuming and your time could be better spent in other ways.
What areas do Diamond Ratings cover?
Diamond Ratings currently cover:
- Absolute Return Funds
- Risk Targeted Fund Families
- Risk Focused Fund Families
- Multi-Manager Return Focused Funds across the four relevant IMA sectors – Mixed Investment 0-35% Shares; Mixed Investment 20-60% Shares; Mixed Investment 40-85% Shares; and Flexible Investment
- Multi-Asset Return Focused Funds across the four relevant IMA sectors – Mixed Investment 0-35% Shares; Mixed Investment 20-60% Shares; Mixed Investment 40-85% Shares; and Flexible Investment
- Index Trackers - Exchange Traded Funds and Open Ended Funds
- Income Funds
Importantly, given that Risk Targeted and Risk Focused funds are dispersed across at least six different IMA sectors, we have created our own universe to enable advisers, and their clients, to make sensible like for like comparisons. In so doing we believe that we have simplified the process of assessing these growing sectors. Equally, the same applies to Unitised DFM funds, which have never had their own discrete sector.
How are Diamond Ratings calculated?
Diamond Ratings give funds and fund families an independent rating of 1 to 5 based on a detailed and well-structured scoring process allowing advisers – and their clients – to see where they sit in the market in terms of:
- Fund performance
- Competitiveness in other key areas such as cost, scale, access and manager longevity
As part of the independent Defaqto brand, they provide a completely unbiased assessment, using a detailed, robust and transparent process derived from both quantitative and qualitative features.
Based on our analysis of each fund area, market developments and regulatory influences we select an appropriate range of features which, added to our performance-based fund data, enable a comparison of the funds available across the whole universe. It is important to note that we analyse the whole of any particular market, as completely as is practical.
Overall fund rankings are calculated using a scoring method called Data Numerical Analysis (DNA). Each fund element is scored from 1 to 5, with a score of 5 denoting that the fund has the highest characteristics in the market for that element; a score of 1 indicates it has the lowest.
Totalling the individual DNA scores across the chosen range of features gives an overall DNA score, which we use to rank funds. We also identify and calculate appropriate levels that determine each of the 5, 4, 3, 2 and 1 ratings within each fund area that we rate.
Due to the segmentation in the market mentioned above, we have established appropriate methodologies to assess: individual funds that primarily focus on generating returns, either absolute or in excess of their peer group; risk targeted fund families that are specifically designed to offer gradations of risk and return; risk focused fund families; and passive funds.
Our methodology is designed to provide an overall rating for a fund or family based on a wide range of distribution channels: including direct, through platforms and through ISAs etc. For a fund to score highly, it should have a good appeal to investors across all of the different avenues to access the fund and also achieve a required aggregate score across both the quantitative and qualitative features.