Our new Diamond Ratings and how advisers use ratings

16 February 2015

Patrick Norwood – Insight Analyst for Funds

Defaqto just released the latest annual round of Diamond Ratings, on 1 February. This year we've added Diamond Ratings to help advisers and investors navigate the expanding fund universe by providing an independent assessment of where funds and fund families sit in the market.

Robust methodology

When assessing multi-asset funds, we initially put them into different ‘universes’, so that we are comparing like with like. 

Return focused funds are rated using slightly different factors to those of risk targeted/risk focused. This is mainly due to the fact that with return focused we rate at the fund level, whereas with risk targeted/risk focused we consider and compare funds as ‘families’.

We split the return focused universe:

  • Firstly, by whether it is single or multi-manager
  • Secondly, into four different IMA sectors

As a result of this process, we establish eight sub-universes.

In the case of risk targeted/risk focused fund families, we have created a synthetic universe, with the constituent funds of the families being found across various IMA sectors. The reason for this approach is that we believe that comparison within IMA sectors would be misleading and would not add as much value if each fund within a family was assessed individually.

With passive funds we split by asset class and whether they are an ETF or a unit trust/OEIC.

Scoring system

Once the fund or family has been placed in its appropriate universe and sub-universe, we then apply our Data Numerical Analysis (DNA) methodology, with each feature and performance attribute being scored from 1 to 5.

A score of 5 indicates the best possible characteristic (top quintile) and 1 indicates the worst characteristic (bottom quintile). The weighted sum of the individual DNA scores across the range of fund features and performance attributes provides an overall DNA score, which we use to rank each fund (within its respective universe).

Rating factors

Factors used across our Diamond Ratings include performance (or the ability to track, in the case of passive funds), ongoing charges, fund size, group assets under management and number of distribution partners. There are also other factors specific to the universe being analysed.

If the fund is new or has only recently been launched, the performance measures are replaced by subjective ratings covering the fund manager’s business, team, investment philosophy and process plus their research capability.

Independent and unbiased fund assessment

Advisers and networks can use Defaqto’s Diamond Ratings to support their fund selection and/or fund panel creation process in the sectors of interest to them.

Use our Diamond Ratings because they:

  • Are independent
  • Are based on a wide range of features
  • Are transparent – we publish the factors that we use for each different sector and each year present to the fund management industry our proposed factors and methodology for the following year to give them the opportunity to feed back on these
  • Are ‘whole of market’ – that is, for every sector that we look at, we cover all funds in that sector to the best of our knowledge
  • Cover fund areas which are not always well-covered by others, for example risk targeted funds

View Diamond Ratings

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