Fund and Asset Managers

Learn more about the risk profiling services that Dynamic Planner offer, to help support your funds.

How ACE delivers a strong suit for Suitability

Download our Free Guide to Risk Profiling
Dynamic PlannerPublished: 09 June 2016

When Dynamic Planner launched its ACE fund rating service in January 2016 it did so into an already crowded market of fund research and rating services. Advisers will be familiar with RSM, Morningstar, Square Mile, The Adviser Centre to name but a few, but do advisers know exactly how this research fits into their advice process? I guess for many the fact that someone has carried out a high level of due diligence and identified funds that are of good quality is enough of a reason!

In designing the ACE research process we started with this question. How will our research fit into the advice process and ensure that fund recommendations are suitable? The obvious answer was to make sure that the research factored in a test to determine whether a fund is a ‘good fit’ to the asset classes and models at the core of the Dynamic Planner risk scheme. This does mean that our research is only relevant to Dynamic Planner users, but as DP is used by over 50% of the adviser market that still gives us excellent coverage.

So why is it important that a fund is a good fit to the DP risk scheme?

Ace Rated logos

Each asset class is reviewed quarterly by the DP Financial Analytics team and the mid to long term return and volatility assumptions are updated and agreed by the Investment Committee. This feeds into the 10 Dynamic Planner models which are optimized to match the risk profile for which they are designed. Each asset classed is represented by a benchmark index. The problem is that these are ‘pure’ and it is very difficult to find a fund that bears such a close resemblance to the index. In fact, many funds look and behave very differently to their benchmark index.

For example, our long term assumptions for UK equity are a return after inflation of 4.1%pa, with annualised volatility of 14%. However, over the past year alone funds in the IA UK Equity universe have achieved returns between -18.64% to +18.56% with volatility ranging from 7.91% to 28.86%. I will suggest that a UK Equity fund with 28.86% volatility is not a ‘good fit’ on its own and is not therefore a suitable recommendation to fill 100% of the UK Equity element of a portfolio. Advisers need to be aware that most portfolio analysis tools will only see the broad asset class when they ‘xray’ a portfolio and will miss those funds with higher or lower than average volatility. So, if the tool see’s UK Equity it will report the risk as equivalent to the UK index. In some cases this will significantly understate the actual risk being taken by the portfolio.

The FCA have previously warned advisers not to rely on ‘black box’ solutions to analyse risk so it is important that the research we do helps advisers to identify funds that enhance the integrity of the models.

Our ACE research starts with a quantitative analysis of fund data. We look at 4 key metrics, Performance, Risk, Outperformance frequency, and Tracking error. The tracking error is a key measure for determining if a fund behaves in a similar way to the index.

Once the scores have been calculated and we have completed the additional qualitative work the following ACE scores can be awarded.

Rating

 

Multi Asset Solutions

 

Single Asset Solutions

 

4 ACE

 

Displays consistency with the DT risk model and has an excellent performance history over 5 or more years

 

Displays a high consistency with the DT asset class and has an excellent performance history

 

3 ACE

 

Displays consistency with the DT risk model and has a very good performance history over 5 or more years

 

Displays a high consistency with the DT asset class and has a very good performance history

 

2 ACE

 

Displays consistency with DT risk model and has a good performance history over 3 years

 

Displays a high consistency with DT asset class but still has a good performance history

 

1 ACE

 

Displays low consistency, but is an excellent performer over 5 or more years

 

Displays low consistency, but is an excellent performer

 

 

For each rating we provide a factsheet outlining what the rating means, and how the fund could be used in a portfolio. A 4ACE fund may be suitable to use entirely, whereas a 1ACE fund we would suggest should be combined with another ACE rated fund.

The key is to ensure asset model integrity. By using a consistent model throughout the advice journey the adviser can be certain that the final recommendation is a suitable match for the risk the customer wishes to take.

White papers and articles

  

Request a Demo

Sign up to receive news, posts and free guides

Recent Posts