Cautious investors are supposedly being traded with a very low risk fund that are very erratic. The results would lead to rising apprehension wherein investors could purchase inappropriate products without even realising it.
The warning centre surrounding the risk traded funds is scored between the lowest and the highest. This type of investment has surged in popularity since it provides investors a much clearer portrait of a speculative growth.
The immensely regarded risk-rated funds have been rated within the previous years by independent ranking agencies. The main company that is mainly responsible include Fidelity, Standard Life and Distribution Technology having their respective scoring systems.
The recent data this week revealed that Telegraph found several of these alleged cautious funds were not actually safe as their respective score indicated. A good number were very volatile and the fund ratings were very much pronounced through its peaks and troughs.
While savers become extremely cautious about the presumed low risky investments after the series of misleading selling scam in recent years. While there has been no strong indication of any fault with any of the aforementioned firms, the findings were still able to raise serious queries surrounding the accuracy of the surging systems.
Risk-rated funds are truly becoming very popular nowadays as since they provide an off-the-peg investments that could match a customer’s own risk tolerance. A bar on the middle men who are taking commission on fund sales has been implemented earlier this year made a cost efficient option for many fund advisers.
Several investment managers were beginning to question the independence of the said fund ratings pointing out that the fund management firms are simply paying third parties to obtain good ratings. There is this long standing apprehension that risk rated funds was overdoing the already simple process of creating a portfolio to match the particular needs of an investor. The ratings however, failed miserably to identify how a diversified fund actually works and that some of the said funds were unfairly given the same risk score as the U.K. equity fund that had all its plans laid down.
The Premier Income fund, which invests in the U.K. dividend-purchasing stocks have been given a rating of four by Distribution Technology. This was the same rating given to a multi-asset fund such as F&C Distribution which had an even lower level of volatility over three years ago.
Another cause of concern is the actual fund manager being allowed to change the risk of the fund and keeping the same risk score which normally a fund does not automatically receive a new score.
Distribution Technology in a report said that the short-term past performance data could possibly be misleading as the company took into account its previous expectations for future volatility and performance which placed so much weight in this assessment.
Moreover, the same firm said that the risk scores were reviewed on a quarterly time-frame wherein funds are deemed to no longer by appropriate for the score given leading to the issue of a warning. Should their manager fall short to act or if the fund persistently performed outside its risk score therefore a downgrade or upgrade would inevitably result.
The ratings are generally determined by several number of factors including how a fund is configured and most of the times, the volatility of a given fund will not be representative of what traders and investors would anticipate for its risk score.