INVESTMENTS
MISSION POSSIBLE : HOW TO COMPARE FUNDS IN VOLATILITY MANAGED
Fraser Blain Commercial Director Embark Investments
Comparing funds in the IA Volatility Managed sector is difficult due to their myriad volatility targets . So , what happened when we built a benchmark of our own ?
Investors were warned from the start . When the Investment Association ( IA ) launched the Volatility Managed sector a little under five years ago , it cautioned against using it to compare funds . This is because those it contains use different volatility targets , making at-a-glance comparisons almost meaningless . So , how can advisers assess funds within the sector ? Is it possible to build a benchmark ?
PULL-QUOTE TO GO IN THIS SPACE
The irrelevance of average One of the characteristics of the IA Volatility Managed sector is its diversity . Fund suites use different definitions of volatility ( realised or projected , for example ) and various time frames . The sector also encompasses funds with different risk levels ( including within a single fund family ), so its performance average effectively pools them together . The average also skews towards the risk levels with the most representation . Different definitions of volatility exacerbate a problem that already exists in the world of multi-asset : how to benchmark and cluster funds . While single-asset class funds enjoy broad benchmarks and allow managers to take active risk through security selection and portfolio weighting and trading , the benchmarking of multi-asset funds tends to be fund specific . As a result , grouping tends to be done on a best-effort basis , through exposures ( as with the Mixed Investments 20 % -60 % shares sector ) or risk rating , which is more complex . The issue is compounded by the fact that , even where we have comparable definitions , diverse levels of volatility are still being pooled . The IA Volatility Managed sector not only mixes apples with pears , but small apples with big apples .
How to benchmark funds To build a benchmark , we need to pool funds of similar methodologies , and of similar levels of volatility within those methodologies .
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