In focus
consists of funds with very differing
volatility objectives, namely very high-
and very low-risk funds,” he says.
“We believe that simply listing funds
in a single sector is not useful for
investors. The IA is aware of this and is
looking into how it classifies Volatility
Managed funds.”
He adds: “While we acknowledge
this fact, we do however welcome the
sector’s introduction, because even
though its median performance is
meaningless, it is a good starting point
for investors wishing to find funds
that target volatility as their primary
objective, instead of return.”
Farlow says most of the fund ranges
in the sector are managed with a high
level of consistency, often using the
same underlying investments, but in
different allocations. This means IFAs
using a range are more likely to get an
outcome whereby a fund targeting risk-
level three will be lower-risk than one
targeting risk-level four, for example.
Murkier waters
Chris Rush, senior investment analyst
at IBOSS, says that while the other
multi-asset sectors may be imperfect,
they fare better than their outcome-
driven counterparts.
“Investors have long held issue
with sectors defined by the goal of a
PERFORMANCE OF SECTORS IN 2018
IA Targeted Absolute
Return (-2.81%)
IA Mixed Investment
0-35% Shares (-3.35%)
IA Volatility
Managed (-5.41%)
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
Source: FE Analytics
FE TRUSTNET
-6%
[ SECTOR PROFILE ]
44 / 45
Most of the fund ranges
in the sector are managed
with a high level of
consistency, often using
the same underlying
investments, but in
different allocations
fund rather than its construction,”
he says. “Take the IA Global sector as
an example – it is reasonably safe to
assume the vast majority of the funds
within the peer group are invested in
(long-only) global equities.
“However, things become somewhat
less transparent when wading into
the murkier waters of the Targeted
Absolute Return or Volatility Managed
sectors. These ‘outcome-driven’
sectors leave funds an incredible
amount of scope to potentially fulfil
their objective, both in terms of what
outcome they are looking to achieve
and how they choose to do it.”
A false sense of security
The result, for Rush, is a sector which
in his opinion is hard to understand
and even harder to use as an accurate
benchmark, often leaving no
discernible peer group.
“In our view, the IA Volatility
Managed sector implies a level of
safety that is perhaps misleading,” he
says. “Using volatility as a proxy for
risk is fraught with issues in itself and
draws the investor’s attention to one
small piece of the overall risk-matrix.
It is possible to have a fund that is both
highly volatile, yet extremely low-risk.”
The end result for Rush is that while
there are outliers for the other multi-
asset sectors, he argues their general
premise is easier to understand. “The
description of the sector at least offers
some insight into the funds and how
you can expect them to behave given
the performance of the underlying
asset classes,” he says.
Misconceptions
Farlow adds that one of the
misconceptions about the IA Volatility
Managed sector is that because all the
funds have a volatility objective, they
should be able to protect investors’
capital during market turbulence.
“This assessment is totally incorrect
and we would expect many funds
in the sector to fall during market
turbulence,” he says. “The majority
of the highest-risk funds in each fund
range target a volatility which is similar
to global equities and we would expect
them to perform similarly to global
equities over the long term.”
This was shown in 2018, when the IA
Volatility Managed sector was down
5.41 per cent, compared with a 2.81 per
cent fall from the IA Targeted Absolute
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