Risk Bound Fund Families – a forensic examination

16 January 2017

Mike Turner, Research Manager (Funds and DFM)

Learning objective: In this article we’ll be deconstructing Risk Bound Fund Families and looking at the underlying figures to give you a clear picture of what the marketplace currently looks like.

What do we mean by Risk Bound Fund Families?

Some groups offer multi-asset fund ranges designed to cater for different client risk profiles, from low to high risk. These families are usually managed by the same team or manager and will usually apply the same processes across the range.

Defaqto has identified 95 Risk Bound Families, with 37 of these being Risk Targeted Families where each fund within the family is targeting a specific level of volatility. Usually the fund manager will target volatility bands, setting a lower and upper limit.

The other 58 Families are Risk Focused - the funds within these families don’t target specific volatility levels but instead are bound by risk due to other constraints such as the IA sector they sit in and its corresponding asset class limits. As the risk level within the fund family increases, typically the greater the allocation of equities.

Shape Analysis

The expectation with Risk Bound Fund Families is that funds should perform in line with their marketed risk order. Users of the Defaqto Engage system can analyse over a period of 10 years if fund families have performed in accordance with the marketed risk order. This is achieved through the use of the Engage ‘Shape’ analysis tool.

Out of the 95 Risk Bound Families identified, 73 have been running for over 3 years, of which 63% have a shape that is in line with the marketed risk order. The funds within these families are performing in line with the marketed risk progression from low to high.

Volatility Targets

On average Risk Targeted Fund Families target a volatility of 4% at the low end. This ranges from some families targeting 0% to others targeting a 12% minimum volatility. Most commonly the lower boundaries range from a target volatility of 3 to 4%.

When we look at the upper target levels, on average Risk Targeted Fund Families target a volatility of 14.7%. This ranges from some families targeting 12% to others targeting a 22% maximum volatility. Most commonly the upper boundaries range from a target volatility of 12 to 14%.

Low Cost Investment Vehicles

Some fund managers will attempt to lower costs through the use of passive vehicles such as exchange traded funds (ETFs) or passive open ended investment companies (OEICs)/unit trusts (UTs) within the underlying portfolios of the Risk Bound Funds. The fund manager can then alter the allocation of assets according to the intended risk progression from one fund to another.

Passive OEICs/UTs and ETFs are cheaper than actively managed funds meaning that the annual charges of the Risk Bound Fund should be a cheaper alternative to a Risk Bound Fund that invests in active funds. 12% of Risk Bound Fund Families are at least 90% invested in passive vehicles. As a result the average ongoing charges figure (OCF) of these families is 0.8% compared to an OCF of 1.3% for families that don’t utilise passive funds.

The research in this article has been performed using data from the Risk Bound Families table within the Defaqto Engage research system.

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