Managed solutions
24 August 2015
Jason Baran – Insight Analyst (Investments)
The term 'managed solution’ is used to refer to a range of multi-asset funds that vary by level of asset allocation and/or risk across the spectrum. They have become popular since the introduction of the RDR in 2013, as advisers now need a way to show that the funds they are recommending for their clients are suitable.
This approach stands in contrast to advisers picking funds themselves for clients in order to build a portfolio, whereby the level of risk may not be appropriate and with no method to ensure the level of risk is consistent over time.
Reasons why the practice of an adviser choosing their clients' funds is declining in favour of choosing a managed solution:
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Suitability
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There's a high level of portfolio-construction skill and knowledge involved with ensuring the selection of funds is appropriately weighted across asset classes and strategies to meet a client’s required risk level. Issues with this include: How can an adviser claim to have more expertise in this regard than fund provider firms? Also, how often will the adviser rebalance the portfolio to ensure it remains true to the risk tolerance of the client? |
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Research resources
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Advisers don’t necessarily have the time or resources to properly research asset classes, funds and investments for their returns, and how they might behave in an investment portfolio. |
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Performance measurement
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To make a fair measure of delivering value for a client, the adviser’s selection of funds and assets should be tested against either a peer group or an asset-weighted index of corresponding risk level, similar to a benchmark. The question arises: How many advisers have access to performance benchmarks and are licensed to use them commercially? |
Types of managed solution
At Defaqto, we have separated the multi-asset universe into two broad categories of fund family:
Risk targeted
These fund families have a range of funds operated by the same fund manager or team. Each fund is set to maintain a certain level of risk by both the initial asset allocations, and also by monitoring the volatility of the funds. Should the funds prove too volatile, the fund manager will take steps to reduce volatility by reducing exposure to risky assets, or using derivatives such as futures and options.
Risk focused
Risk focused fund families are similar to risk targeted fund families but with one key difference. Unlike the above, the fund manager will not explicitly take action should the funds’ level of risk or volatility fall outside of its designated boundaries.
The underlying idea is that the fund manager will tolerate volatility deviations slightly above or below its intended level for a short period in the anticipation that these noisy movements shouldn’t unduly influence the long-term performance of the fund.
Hence, risk focused fund families make more sense for investors who wish to choose a level of risk for their fund investment, but are willing to tolerate the fund acting out of these bounds on a short-term basis on the assumption returns will be slightly higher in the long term, while risk targeted fund families are for clients who wish to be very specific about the volatility levels they receive.