We are in continuous dialogue with advisory businesses and they have told us that they require an independent assessment of the fund and model portfolio (MPS) family arena as well as the fund universe. And, of course, for compliance reasons, such an assessment has to look at the whole market across the sectors covered.
In response to this, we launched our comprehensive Defaqto Diamond Ratings back in 2013.
Diamond Ratings will help you segment the funds and portfolios available in each sector because they indicate, at a glance, where for example Risk Targeted Fund Families or Multi-Asset Income Funds sit in the market based on both performance and a range of other key attributes.
In summary, Defaqto Diamond Ratings:
- Are a natural evolution of our previous research into managed funds and renowned consultancy activity
- Are whole of market across the sectors they cover
- Uniquely rate families of funds and portfolios to give advisers an insight as to whether the intended gradations of risk and return have been delivered
- Combine a quantitative assessment of both performance and numerous other data points, including manager tenure, assets under management and costs
- Are backed by Defaqto’s established and independent brand
Diamond Ratings are available within our research software for advisers - Engage - enabling you to compare a shortlist of funds and fund and MPS families, and to research the market generally.
How do Diamond Ratings benefit advisers?
Diamond Ratings help advisers, and their clients, see at a glance where a fund or fund/MPS family sits in the market and, therefore, make it much easier to segment the propositions available in this sector.
Uniquely, Defaqto Diamond Ratings support your research into fund and MPS families.
Choosing particular fund and MPS families rather than matching funds and portfolios from many different providers to your clients’ risk profile should make your proposition more consistent and flexible at the same time. When you or your client wish to swap funds or portfolios, this is much easier within a family rather than moving from one provider to another. Further, if you use a number of funds or MPS from a smaller number of providers, you may also have more power to negotiate better client terms.
However, comparing families can be complex. At the start of 2021 there were 122 fund families in the market tracked by Defaqto, consisting of 536 individual funds and this number is expected to increase further. Performing initial and ongoing due diligence on all families is extremely complex and time consuming and your time could be better spent in other ways.
What areas do Diamond Ratings cover?
Diamond Ratings currently cover:
- Absolute Return Funds
- Risk Focused Fund Families
- Risk Targeted Fund Families
- DFM MPS (Direct) Portfolio Families
- DFM MPS (Platform) Portfolio Families
- Multi-Manager Return Focused Funds across the four relevant IA sectors – Mixed Investment 0-35% Shares; Mixed Investment 20-60% Shares; Mixed Investment 40-85% Shares; and Flexible Investment
- Multi-Asset Return Focused Funds across the four relevant IA sectors – Mixed Investment 0-35% Shares; Mixed Investment 20-60% Shares; Mixed Investment 40-85% Shares; and Flexible Investment
- Single-Asset Return Focused Funds across UK equity; European ex-UK equity; North American equity; Japanese equity; Developed Pacific ex-Japan equity; Emerging Market equity; Global equity; UK government bonds; UK corporate bonds; and UK index linked bonds
- Index Trackers - Exchange Traded Funds and Open Ended Funds
- Income Funds – Multi-Asset; Equity; and Bond
- Workplace Pension Default Funds
Importantly, given that Risk Targeted and Risk Focused funds are dispersed across at least six different IA sectors, we have created our own universe to enable advisers, and their clients, to make sensible like for like comparisons. In so doing we believe that we have simplified the process of assessing these growing sectors.
How are Diamond Ratings calculated?
Diamond Ratings give funds and fund/MPS families an independent rating of 1 to 5 based on a detailed and well-structured scoring process allowing advisers – and their clients – to see where they sit in the market in terms of:
- Performance, adjusted for risk
- Competitiveness in other key areas such as cost, scale and manager longevity
As part of the independent Defaqto brand, they provide a completely unbiased assessment, using a detailed, robust and transparent process derived from both quantitative and qualitative features.
Based on our analysis of each fund and MPS area, market developments and regulatory influences we select an appropriate range of features which, added to our performance-based fund data, enable a comparison of the funds and MPS available across the whole universe. It is important to note that we analyse the whole of any particular market, as completely as is practical.
Overall funds and family rankings are calculated using a scoring method called Data Numerical Analysis (DNA). Each element is scored from 1 to 5, with a score of 5 denoting that the fund or family has the highest characteristics in the market for that element; a score of 1 indicates it has the lowest.
Totalling the individual DNA scores across the chosen range of features gives an overall DNA score, which we use to rank funds and families. We also identify and calculate appropriate thresholds that determine each of the 5, 4, 3, 2 and 1 Diamond Ratings from these overall scores within each area that we rate.
Due to the segmentation in the market mentioned above, we have established appropriate methodologies to assess: individual funds that primarily focus on generating returns, either absolute or in excess of their peer group; fund families that are specifically designed to offer gradations of risk and return; MPS families; funds that pay a ‘natural’ income and passive funds.