Oliver Wallin, investment director at Octopus Investments, on why the rush to risk rate funds could lead to client disappointment.
When the 1997 film Titanic was re-released earlier this year in 3D format, critics at the time observed that the trend for retro-fitting 2D films with 3D technology was like putting ‘go-faster’ stripes on a car.
It may, for those of a certain bent, make the vehicle look that little bit more impressive from the outside, but in reality it offers nothing in terms of improved performance. It certainly will not enhance the journey or get you to your end destination any quicker. Which in the case of Titanic could have been a downside for some.
In the past few months new entrants into the risk-rated portfolio market have been appearing on a regular basis. The question is whether these new entrants are doing anything differently or simply repackaging existing products. It is a crucial distinction for advisers to make.
Is risk-rating funds the equivalent of giving an old car a fresh re-spray?
New paintwork, same engine?
We should make a clear distinction here as to the difference between ’risk targeting’ and ‘risk rating’.
Risk targeting, or managing to a risk target, will form part of the portfolio objective, informing the fund management approach and determining the investment decisions taken therein. It is an embedded part of the overall proposition.
Risk rating, on the other hand, is a means of categorisation driven, in the main, by the risk profiling tools being adopted in the advice process. Risk rating will help at the initial portfolio selection stage but may well cause problems further down the line.
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