Multi-asset risk targeted funds – here to stay?

Patrick Norwood, Insight Analyst (Funds)

As discussed in previous newsletters, risk targeted funds exist as ‘families’ of funds - a group of funds (4 or 5 on average) offered by a firm, managed by the same team and following the same investment process. The difference between each fund in the family is the level or range of risk that they target. This will be achieved primarily through different asset allocations across the family but also, to a lesser extent, via selection of the underlying funds. Each fund in the family can therefore be used by different investors, depending on their risk tolerance.

The multi-asset risk targeted fund market in the UK initially saw strong growth, from around half a dozen fund families in the mid-2000s to 35 families in 2013. The number of actual funds in the families, meanwhile, increased from about 20 to 166 over the same period. Much of this growth was due to two reasons. Firstly, the Retail Distribution Review (RDR) friendly nature of risk targeted funds. The typical adviser post-RDR focuses on the client’s natural risk and capacity to accept drawdowns and then recommends solutions based on these. Asset allocation and fund selection, meanwhile, are outsourced to the fund manager. The other reason was the huge ‘Credit Crunch’ related market volatility observed around 2008. This was seen by many as a watershed where investors’ primary concerns shifted from generating the best return possible to risk and protection of capital.

The last couple of years, however, have seen much slower growth, with only a couple of new family additions in each of the last two years. In addition, Threadneedle’s Managed Portfolio risk targeted family was merged into Seven Investment’s risk targeted funds earlier in 2015 and JP Morgan Asset Management has recently announced the closure of its Fusion range of risk targeted funds, as it failed to attract money. These observations raise the question: has the risk targeted market reached saturation or is this just a ‘blip’ in the upward growth previously seen?

As product life cycle theory states, many new products will go through an ‘s-curve’: initially slow growth as the product, relatively unknown, is launched and only early-adopters use it; then rapid sales growth as people become more familiar with the product and it gains traction; and finally slowing growth as the market reaches saturation and maturity. The risk targeted fund market may simply have reached the ‘levelling off’ phase.

Meanwhile, with the government’s ‘Pension Freedom’ reforms having now been enacted, with the result that retirees are no longer forced to buy an annuity, advisers have become much more focused on income funds or income-producing outcomes, which could also explain the recent levelling off seen in the risk targeted market. This is not all bad news for risk targeted funds as there are already a handful of risk targeted fund families that consist of purely income funds in the family and this could grow. In addition, many risk targeted families have one or two income funds within their range.