Dynamic Planner ACE Fund Ratings Service. Adviser Guide

Transcription

1 Dynamic Planner ACE Fund Ratings Service Adviser Guide

2 Distribution Technology (DT), the leading provider of risk profiling, financial planning and wealth management technology for financial advice firms. More than 6,000 financial advisers regularly use DT s award winning, core product Dynamic Planner to profitably profile, plan and manage their wealth clients and on a busy day Dynamic Planner will support the creation of over 1,000 pieces of wealth advice. DT works with more than 100 asset management firms to risk profile over 1000 of their funds, representing more than 50bn in invested assets and helping advisers assess their suitability. Dynamic Planner is integrated into a growing number of investment platforms, enabling advisers to gain straight through new business processing and valuations, dramatically reducing the cost and risk of servicing their end clients.

3 DT ACE Fund Ratings This guide provides an overview of our new fund rating service that is available in the Dynamic Planner Portfolio Suitability Hub - specifically designed to help ensure investment suitability for your clients. What are the new DT ACE ratings? ACE stands for Asset Consistency and Efficiency. We equally weight the following quantitative research attributes within these two central pillars over defined periods to evaluate a fund rating from 4 ACE (being the highest) to 1 ACE: Consistency Relative to the DT risk model Efficiency In absolute terms Frequency of out-performance Performance history Tracking error Volatility 3

4 Why is this important to users of Dynamic Planner? With your focus on delivering initial and ongoing investment suitability to your clients, the combination of fund risk profiling and the ACE fund ratings, all embedded into Dynamic Planner s software and asset modelling is a uniquely relevant proposition. Why is DT offering fund ratings? Over recent years, DT has built the most comprehensive risk profiling service across the UK market, with experience in assessing the relativity of around 1000 products from 100 asset managers to the Dynamic Planner model. This service provides our long term assessment of the expected volatility journey of a product, however no opinion on its other merits is given. With such a wide risk profiling coverage, the next step of providing a rating of the funds is a logical extension of our service to meet the demands of the growing user base of Dynamic Planner. The Research Coverage The ACE research ratings offer whole-of-market coverage of funds for 3 specific adviser needs: 1. single asset funds - for the construction of model portfolios 2. the Investment Association (IA) universe of multi-asset funds - which includes all those we have risk profiled 3. risk targeted - the subset of multi-asset funds that risk target to an asset allocation model or defined set of volatility boundaries via a family approach We only consider actively managed unit trusts/oeics which are listed in the IA sectors. The fund universe is then filtered via a quantitatively engaged process to include only retail focused funds. 4

5 How are the ACE Ratings awarded? ACE ratings range from ACE 1 to 4 (being the highest). Summary Criteria for Single & Conventional Multi-Asset Fund Ratings 4 ACE Consistency with the Dynamic Planner Asset & Risk Model and performance efficiency is excellent over 5 years. 3 ACE Consistency with the Dynamic Planner Asset & Risk Model and performance efficiency is very good over 5 years. 2 ACE Consistency with the Dynamic Planner Asset & Risk Model and performance efficiency is very good over 3 years. 1 ACE Consistency with the Dynamic Planner Asset & Risk Model is lower but performance efficiency is excellent over 5 years. 5

6 Research Methodology in Detail Our initial screens and quantitative engagement process have identified from a universe of around 2000 qualifying funds, just over 250 funds that have been ACE rated. A quantitatively engaged process It is important to stress that whilst the research is predominantly quantitatively based, it is not just a black box process. From the results of our careful filtering we remove those funds which we do not consider are promoted to, or appropriate for, the UK retail market. For example: funds aimed at the institutional market gross distributing share classes funds below 20m in size funds where the assets under management across the individual firm are less than 100m The single vs multi-asset research process Whilst the intention is to keep the process as consistent as possible across the varying types of funds, there are some important distinctions in our assessment criteria. For the single asset funds, we want to identify those funds which are consistent with the Dynamic Planner model assumptions but which are primarily focused on delivering outperformance against their IA sector peers. For example a UK All Companies Fund will be measured against our UK equity index assumption for consistency and a 5 year performance history (if available) is considered versus its IA sector peers to see if how good the efficiency attribute has been. 6

7 What then is the difference for conventional multiasset funds research? For these multi-asset funds, the consistency comparison is made against the Dynamic Planner asset allocations. For example our current model asset allocation for Dynamic Planner Risk Profile 5 as at January 2016 is shown here. This individual asset mix and the performance of the underlying indices used by the DT Asset & Risk Modelling Team enables the creation of a synthetic benchmark. This is then used to assess the consistency attributes of a fund which, in this example, is risk profiled 5. The performance efficiency measures are assessed relative to other funds in the same identified peer group of risk profiled 5 funds. It is important to note that the various mixed asset IA sectors are not considered here as we are focusing on relevance of the ratings for specific users of Dynamic Planner. What about those multi-asset funds that have not been risk profiled by DT? There are a relatively small number of multi-asset funds which DT has not already risk profiled. We do however include these in our screens by risk mapping them to the nearest expected Dynamic Planner risk profile, using the latest asset allocation data available from our fund research database. 7

8 Risk Targeted Funds During 2015 we focused on developing our Dynamic Planner Risk Target Managed (RTM) service and are working closely with a number of leading asset managers. Our independent oversight into the running of their portfolios within a defined set of commitments helps ensure that on a best endeavours basis, the allocated Dynamic Planner risk profile remains unchanged. However since it is our intention to offer a whole-of-market, consistent fund research process, the growing number of other specialist multi-asset solutions which are explicitly volatility targeted are also included alongside the RTM solutions. Such specialist funds need to be considered differently to stand-alone conventional multi-asset products within the ACE ratings framework. Summary View of Ratings Criteria for Risk Targeted Multi-Asset Funds 4 ACE Displays excellent consistency & efficiency with the Dynamic Planner Asset & Risk Model over 3 years 3 ACE Displays very good consistency & efficiency with the Dynamic Planner Asset & Risk Model over 3 years 2 ACE Displays excellent consistency & efficiency with the DT Asset & Risk Model over shorter time periods 1 ACE Displays very good consistency & efficiency with the DT Asset & Risk Model over shorter time periods 8

9 How does DT apply the ACE ratings concept for risk targeted funds? We have researched all those retail focused products that are explicitly targeted to a volatility boundary in some way, including the Dynamic Planner Risk Target Managed subset of funds. This peer group of risk targeted family ranges are ranked relative to the risk and return outcomes for the appropriate Dynamic Planner 1-10 asset allocations. Either we have already risk profiled the range or we map the particular funds to the nearest Dynamic Planner risk profile using the latest available asset allocation data. Why are shorter time periods used in your assessment? This reflects the relatively recent arrival of such fund families on the market. Our intention is to widen the performance history to the full 5 years as their performance history develops. A family approach: Where the fund management group offers a range of solutions across the risk spectrum. The ACE ratings for risk targeted funds have been applied across the family of funds offered by the manager, where they meet the success criteria over the defined period. 9

10 Delivering Ongoing Suitability We review the data on a quarterly basis and our intention is keep the number of ACE rated funds to a reasonably manageable figure to maintain their relevance for advisers. Do the ratings reflect risk-adjusted performance? Yes. We blend quantitative measures such as volatility, tracking error and the frequency of outperformance relative to the Dynamic Planner model or IA peer group. Combined, these help us to identify those funds which have exhibited a superior risk-adjusted performance track record. How long is an ACE rating allocated? We would expect a fund s ACE rating to apply for a full 12 month period, given the extensive quantitative performance screens applied at the outset. We conduct a quarterly update of the various screens to ensure that the fund continues to meet the ACE rated criteria. Please note that we reserve the right to amend or even withdraw an ACE rating at any time should this become necessary. How often would you expect a rating to change? Our engaged quantitative process is rigorous in its application and we are not trying to reward short term performance. Whilst we cannot be prescriptive as to the precise circumstances when a rating will change, we do not expect there to be a high turnover of rated funds when viewed over a twelve month period. Is 1 ACE still a good rating? Yes most definitely. We recognise that some skilled fund managers have delivered excellent performance but are not concerned with managing assets consistently to the Dynamic Planner risk model assumptions. To reflect this, we have the 1 ACE rating. What are the circumstances where an ACE rating will change or even be removed outside the normal quarterly process? Scenarios such as a significant change in fund mandate or manager tenure would lead us to re-consider the ACE rating, since the quantitative attributes measured previously may no longer be relevant. How will I be notified of a rating change? We will provide an alert via our monthly Risk & Reward Newsletter (contact us to subscribe) All ratings will be immediately updated in the Portfolio Suitability Hub of Dynamic Planner. 10

11 How to access the ACE ratings The ACE research ratings each have an identified logo and are now in the Dynamic Planner Portfolio Suitability Hub. There are also filter options to help narrow down your search for ease of use. You can also find an ACE Research Technical Guide in the Resources section of Dynamic Planner, if you wish to get more into the detail. We also provide overview material on our website Dynamic Planner.com. 11

12 Further Q&A s Is an ACE rating an explicit buy recommendation from DT? No. The ACE Fund Ratings reflect the results of DT s quantitative research process with the various attributes collated into a uniform scoring matrix and assessed relative to other funds in the same identified peer group. They are provided for information purposes only and should not be construed as specific investment advice from DT. The ratings service provides a structured approach for refining and monitoring a selection of funds that would be suitable for further consideration by users of Dynamic Planner. Will an ACE rating be applied to all IA sector funds? No. We will only apply a rating where we can clearly discern a superior consistency and efficiency track record. Hence there may be IA sectors where the ACE attributes are simply not sufficiently evident to justify a rating at this time. For example, this may be due to the diverse nature of the funds listed in the IA sector, such as the specialist, unclassified or property sectors. Or where there are just too many funds in a sector with insufficient past performance data. We do however intend to further develop our research coverage using our quantitative engagement process. For some fund sectors active management has not consistently delivered the required performance efficiency to justify an ACE rating. Over time, we will consider other potential solutions such as passive funds to provide an alternative. Why are you excluding passive funds from your research? Our initial focus is on actively managed funds since that is where the majority of fund selections made within Dynamic Planner occur. We will consider widening the scope of the research in due course for passive vehicles (including ETFs). Will you be including Pension Funds & Investment Trusts in your research? We will consider widening the scope of the research in due course, based on adviser demand. How do the Dynamic Planner ACE ratings differ from other quantitative based ratings? There are a number of providers such as FE Crown, Morningstar Star and Lipper Leaders ratings which use various defined past performance data points for their evaluation. The unique element of the ACE ratings is the asset consistency measures versus the Dynamic Planner model assumptions. Combined with the efficiency attributes, this enables the user to consistently compare apples with apples when selecting suitable investment solutions. 12

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