Morningstar launches service comparing risk of Ucits IV funds

Morningstar UK is launching its own version of measuring and categorising how risky Ucits IV funds are, arguing that the somewhat contentious method mandated by Brussels has important shortcomings.

Managers of Ucits IV funds must include the measurement, known as the synthetic risk and reward indicator (SRRI), as part of the key information document they give investors by July next year.

The SRRI – a number between one and seven – is meant to allow investors to compare directly the riskiness of one fund with another, using common methodology to arrive at each fund’s number.

It also aims to simplify the understanding of investment risk, which has numerous measures including simple volatility, Value at Risk, and factor risk among other measures.

The SRRI is applicable to traditional, absolute or total return funds, and even structured products.

But Morningstar UK says the prescribed specification from the European Securities & Markets Association to calculate it gives managers significant leeway in certain areas, and this could make it impossible for buyers fairly to compare funds from different groups.

One shortcoming is that ESMA leaves “considerable room” for managers to interpret how to fit their products into fund types.

Another is uncertainty about how to ‘back-fill’ performance for funds that have a limited track record.

A third problem is that there is leeway for fund companies to select starting points for measuring their funds’ SRRI.

Morningstar UK also argues the SRRI measure has boundaries that are too static between risk buckets, it is too simplistic, and it gives no help with portfolio construction.

Andy Pettit, director of pan-European data and research strategy for Morningstar, (pictured) said: “These variables are likely to cause inconsistency in SRRI calculations across the industry, despite the best intentions of the SRRI to be a meaningful figure that is universally comparable.”

He is not along in being concerned.

The UK’s Investment Management Association and Association of British Insurers have already argued that any risk indicator should be based on volatility of the underlying assets and not, as possible with SRRI, on funds themselves. The associations base their argument on finding 70% of asset classes would have moved between risk levels between 2006 and 2009.

Morningstar will calculate the SRRI for all Ucits funds on its database, except for funds under five years old and funds that are in a Morningstar category that does not have an assigned benchmark, due to the heterogeneity of constituent funds.

Other key points of Morningstar’s method will be the use of performance histories of older share class to ‘extend’ performance of share classes less than five years old; and collecting additional data points to enable calculations for absolute and total return, lifecycle, and structured funds.

The data provider will calculate the SRRI for all Ucits funds weekly, or monthly where weekly prices are unavailable.

The Morningstar SRRI number will be able to be used as well as, but not instead of, the official SRRI endorsed by each fund group.

Morningstar UK’s SRRI tool is available via Morningstar Integrated Web Tools and Morningstar Licensed Data feeds. It plans to add the calculation to Morningstar Direct global institutional research platform, and to retail and adviser platforms.


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