An appetite for Risk Mappings

14 November 2014

Mike Turner - Assistant Research Manager for Funds and DFM

In recent years advisers have been increasingly turning their heads in the direction of volatility risk as a fundamental metric to assess in the recommendation process. As a result, the need to be able to quickly and efficiently group funds into risk categories has become apparent. This article focuses on current facts and figures relating to our risk mapped range of funds, which has been derived from the data available in software Defaqto Engage.

The launch of the Defaqto Risk Mappings in Engage has made it possible for advisers to select multi-asset funds that correspond to clients' accepted risk tolerances, whether that risk level has been obtained by assessing the client’s natural risk level or through Defaqto’s psychometric risk profiling questionnaire. Once the client’s risk profile is determined the Defaqto risk mapped funds can be matched to the client’s risk profile.

What the figures in Engage tell us 

The total assets under management for all funds that are currently risk mapped by Defaqto are £8.1 billion. Of the total number of risk mapped funds, 70% are UCITS-compliant (Undertakings for Collective Investment in Transferable Securities). UCITS-authorised funds generally offer greater liquidity, transparency and risk management.

All risk mapped funds are actively managed, with 30% having adopted a blended approach, whereby both active and passive assets such as ETFs have been adopted into the manager’s investment strategy 

Of all risk mapped funds, 94% operate a multi-manager management approach. Multi-manager funds are segmented into two distinct approaches: manager of manager and fund of funds, with the management of the fundss assets outsourced by the manager through external fund manager mandates (manager of manger) or invested into other funds (fund of funds).

Of the 94%, all use a fund of funds approach to management and 87% implement an unfettered approach whereby the underlying funds are either all externally managed or a mixture of internally/externally managed. Only 13% operate a fettered fund of funds approach whereby the underlying funds are all internal funds.

The average ongoing charge figure (OCF) is 1.38% for clean share classes in our risk mapped range. 

Average three-year annualised return for each Defaqto Risk Mapping

The below table outlines the average three-year volatility, average three-year annualised return and average three-year Sharpe Ratio for each risk mapping level:

Defaqto Risk MappingAverage three-year volatilityAverage three-year annualised returnAverage three-year Sharpe Ratio
1 0 0 0
2 3.36 6.08 1.61
3 4.55 7.08 1.46
4 5.74 8.20 1.32
5 6.43 9.15 1.31
6 7.51 9.85 1.22
7 8.87 11.10 1.18
8 10.12 11.68 1.10
9 10.47 11.76 1.07
10 0 0 0

 

Defaqto risk mapped universe

This table shows how many Risk Mappings there are for each level:

Level Number of Risk Mappings
Share classes 383
Funds 66
Risk targeted families 10
UDFM families 3

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