Risk based products mis-understood – Fund Forum

The increasingly popular field of risk-based fund products will suffer from a number of hurdles, not least explaining to investors what the term actually means, according to panellists discussing the topic at Fund Forum in Monaco yesterday.

Fund providers said the family of funds being managed according to risk rather than explicit return targets had become more popular after “the failure of markets to produce returns for clients in the crisis, but also the failure of fund providers to produce returns, which shows up very graphically during the crisis. Investors and IFAs are really disappointed by downside risk they have suffered.”

The subsequent emergence of risk-based funds is “borne out of failure, rather than from progress of the industry,” they said.

Alistair Haney, associate director global funds desk at Zurich Financial Services, said the demand for risk-based products was most evident in the UK, less so in Continental Europe as yet, or Asia or Latin America.

The panellists were divided over how to define whether an outcome-based fund was successful or not, not least because it could be very complex to explain a complex outcome target to an unsophisticated client.

“If the outcome is to be ‘volatility controlled in your strategy’, will investors understand that? No,” said one panellist.

The participants also disagreed over whether fund providers and client advisers ‘succeeded’ if they satisfied the outcome they felt from a professional perspective a client should want, or it was successful to provide the outcome – and type of product – a client wanted, in spite, perhaps, of their own better long-term interests.

Dan Kemp, investment director at Saltus, said the UK had a tradition of clients having portfolios built for them by professionals, whereas in markets like Japan clients might be provided with faddish products which are “what they want”.

One panellist said: “In Japan you see products made which from a Western perspective you would say are very risky, and investors there put their money into Brazil’s real, which at some point will blow up, but the investor over there is happy. In Singapore there is the tendency to buy anything that’s ‘hot’, and from a fundamental perspective you think, ‘God how awful, should you be allowing people to buy funds like they buy make-up?'”

Richard Haxe, senior managing director head of EMEA clients at Alliance Bernstein, said his firm was seeing ever more clients wanting customised portfolios around pre-defined value at risk measures, where the client would give the asset manager set risk parameters.

But Zurich Financial Services’ Haney said risk was a “very complicated question [which] many customers do not understand”, so it was crucial advisers have the tools to explain it.

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