Dynamic Planner ACE Fund Ratings Service. Technical Guide

Transcription

1 Dynamic Planner ACE Fund Ratings Service Technical Guide

2 Dynamic Planner ACE Ratings Technical Guide Contents Introduction 3 Fund Classification 4 The Initial Quantitative Screen 8 Post Quantitative Screen Ratings Governance 9 Ratings Criteria Definitions 10 Ongoing Review Frequency 12 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 Introduction The purpose of this guide is to provide a detailed explanation of Distribution Technology s (DT) methodology in the assessment of its ACE fund rating classification scheme. ACE stands for Asset Consistency and Efficiency with ratings ranging from 4 ACE (being the highest score) to 1 ACE. These ratings are uniquely relevant for advisers who are harnessing the asset & risk model of Dynamic Planner to power their centralised investment process. Combining an assessment of fund quality alongside the proven Dynamic Planner client and fund risk profiling capabilities is a major step towards achieving initial and ongoing investment suitability. The Consistency attributes considered under the scheme reflect how close a fund fits the underlying assumptions of the Dynamic Planner asset & risk model, ranked against the appropriately defined peer group. The Efficiency attributes consider the performance of a fund in its own right, ranked against the appropriately defined peer group. The guide initially considers the screens utilised to identify the single and conventional multiasset fund universe which are generally positioned for potential distribution via the UK retail intermediary channel. It then goes on to explain the quantitative scoring matrix applied across the identified peer group. There is also a separate section explaining the specific matrix scoring approach applied to the subset of risk-targeted multi-asset fund solutions. It is important to note the following: The ACE Fund Ratings reflect the results of DT s quantitative research process and are provided for information purposes only. They should not be construed as specific investment advice but instead they provide a structured approach for refining and monitoring a selection of funds that would be suitable for further consideration by users of Dynamic Planner. 3

4 Fund Classification The Standard Fund Classification Scheme The Quantitative Assessment process measures various aspects of fund performance with reference to a specific external index (or composite) and makes comparisons within defined peer groups. The investment fund universe can be broadly divided between single or multi-asset funds. Single Asset Funds These are funds that are substantially invested in a single asset type and listed in the Investment Association (IA) sector classifications. The table below indicates the matching to one of the set of 15 asset classes that are core to Dynamic Planner asset & risk model. Dynamic Planner Asset Class UK Cash UK Gilts UK Index Linked Bonds UK Corporate Bonds International Bonds Global High Yield Bonds UK Property UK Equity North American Equity Europe Japanese Equity Pacific Ex Japan Equity Emerging Market Equity Overseas Equity Investment Association Sector IA Money Market IA Short Term Money Market IA UK Gilt IA UK Index Linked Gilts IA Corporate Bond IA Strategic Bond IA Global Bonds IA Global Emerging Markets Bond IA High Yield IA Property IA UK All Companies IA UK Equity Income IA UK Smaller Companies IA North America IA North American Smaller Cos IA Europe Excluding UK IA Europe Including UK IA European Smaller Companies IA Japan IA Japanese Smaller Companies IA Asia Pacific Excluding Japan IA Asia Pacific Including Japan IA China/Greater China IA Global Emerging Markets IA Global IA Global Equity Income Although Dynamic Planner does not recognise global equity funds as a separate entity, these funds are treated as an additional single asset group within the ACE rating process. Comparative performance assessments are made with reference to funds in the same IA sector. So although funds in the IA UK All Companies and IA UK Equity Income are all assessed with reference to a broad UK Equity index for the consistency attributes, relative performance efficiency comparisons are made within the same IA sector. 4

5 Multi-Asset Funds All funds in the following IA sectors are treated as multi-asset funds:- IA Mixed Investment 0-35% Shares IA Mixed Investment 20-60% Shares IA Mixed Investment 40-85% Shares IA Flexible Investment IA UK Equity & Bond Income Within the ACE process, these funds are instead grouped for comparison by their relevant riskprofile grade as measured relative to Dynamic Planner s 1-10 scale. Individual funds are risk-profiled through one of the following three methods:- Formal assessment through the DT Fund Risk Profiling (FRP) service Formal assessment through the DT Risk Target Managed (RTM) service Other funds not included in these above services have their risk profiles calculated using the Dynamic Planner risk mapping calculation method (i.e. projected volatility based on the latest available asset split). The Dynamic Planner risk mapping calculation is based on the covariance matrix applied to the latest asset split with the following limits applied to this method: 1. Allocation to Other Assets is no more than 10% 2. Absolute weighting of long/short positions is no more than 110%. The external benchmark for each DT Risk Group is the historic performance of the current optimised model, using the standard benchmark indices as asset proxies. In addition to funds in the IA Sectors listed above, each DT Risk Profile Group can include funds from other IA sectors (such as IA Specialist and IA Unclassified), where they have been either: Risk-rated through the FRP or RTM service and recognised as a multi-asset vehicle or Risk-mapped through Dynamic Planner and the diversified status is supported by our research database. 5

6 Risk Targeted Fund Classification Scheme Multi-asset funds offered within a family approach of graded volatility boundaries are considered differently to stand-alone conventional products within the ACE ratings framework. We have identified all those retail focused products that are explicitly risk targeted to a volatility boundary in some way, including the Dynamic Planner Risk Target Managed subset of funds. 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. The DT constructed peer group of risk targeted family ranges (currently 21 are included in our screen) are ranked via a standard risk-reward function versus the observed returns of the Dynamic Planner 1-10 asset allocations. The basic quantitative metric used is the Average Difference of Expected Return (ADER) of funds in the risk-targeted range, measured in standard deviations. Classification Scheme Exclusions 1: Excluded IA Sectors Funds in the following IA sectors cannot be reliably mapped to a particular DT Benchmark or Group; Pensions Protected Specialist Targeted Absolute Return Technology & Telecoms Unclassified The exception to this rule are those funds recognised as multi-asset either through inclusion of the DT FRP/RTM services or through our research database (and for which a reliable riskrating can be calculated). 6

7 2: Unreliable Calculated Risk Rating The calculated risk-rating excludes funds with anomalous (or unusual) asset allocation data. The principal exclusion is for funds with non-specific content (allocated to Other ) above 10%. The risk-rating is calculated on the >= 90% allocation data that is visible. Another control excludes funds that have significant long/short positions. Controls Sum of Absolute Weights <= 110% Unadjusted % Other <= 10% 3: Non-retail focused funds The following are examples of funds we exclude from our research: funds aimed specifically at the institutional market gross distributing share classes funds below 20m in size (inclusive of all aggregated share class assets) 7

8 The Initial Quantitative Screen Key Metrics The fund screening process is based on two sets of aggregate measures: 1. a continuous composite score of key attributes (incorporating performance, risk, outperformance frequency & tracking error) and 2. flags reflecting minimum criteria for specific attributes The differences from average are measured in terms of standard deviations. By convention, the standard deviation of volatility and tracking error are inverted so that a high positive SD score always reflects a more attractive outcome. Composite Score (PROT) PROT is the weighted average standard distribution of the range of attributes ( Performance Risk Outperformance and Tracking Error ) over a specified period. The score is structured as follows: Composite (PROT) Score Contributions Weight P: Annualised Performance SD 25% R: Absolute risk (volatility) SD 25% O: Outperformance frequency SD 25% T: Tracking Error SD 25% The annualised performance SD is based on start/end values, whereas the remaining attributes are measured using monthly data over the defined periods. Time Series The PROT scores are independently calculated for 3 & 5 year periods and are not combined, to help assess the impact of shorter and longer run trends. In the case of the risk targeted fund peer group, shorter time periods will be considered, reflecting 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. 8

9 Post Quantitative Screen Ratings Governance Quantitative Engagement Process To evaluate the results of the initial screens, we consider a broad range of factors before a final decision on awarding an ACE rating is made. The following are some of the most significant taken into account: Weak/Poor Performance over 3 years Those funds that may have a strong set of results over 5 years, but there has been a significant deterioration evident over the 3 year period. Share Class Anomaly Funds where a low-cost/high minimum subscription share class is listed as the primary share class as opposed to the identified retail version. The latter is substituted accordingly within the screening process, if available. Recent Fund Manager Changes This is an area of considerable subjectivity given the varying policies of disclosure by firms in the naming of key individual s roles within their respective fund management teams. Our policy requires current manager(s) who have substantial input to the decision-making process to have been in position for 50% of the relevant period. So in case of ACE 3 & 4 rated funds (and 1 ACE for single asset funds) this means 30 months. For ACE 2 rated funds this means 18 months. Alignment to the intermediary advice channel Our intention is to only consider widely available retail focused funds which are positioned (and supported) for use by the UK intermediary market, as opposed to products that are sold exclusively via tied distribution channels or directly. Small asset management firms To exclude smaller specialist asset management houses who do not necessarily fit within the whole-of-market intermediary supported distribution framework, we have a minimum assets under management limit of >= 100m across groups funds in the IA classification scheme. Distributor Influenced Funds Such funds are primarily designed for a particular advice firm and/or are constrained to a particular advice process, making the PROT attributes relative to Dynamic Planner assumptions less relevant. Performance Fees Funds with associated performance fee structures are also excluded from the ratings service. 9

10 Ratings Criteria Definitions Summary Summary Criteria for Single & Conventional Multi-Asset Fund Ratings 4 ACE 3 ACE 2 ACE 1 ACE Consistency with the Dynamic Planner Asset & Risk Model and performance efficiency is excellent over 5 years. Consistency with the Dynamic Planner Asset & Risk Model and performance efficiency is very good over 5 years. Consistency with the Dynamic Planner Asset & Risk Model and performance efficiency is very good over 3 years. Consistency with the Dynamic Planner Asset & Risk Model is lower but performance efficiency is excellent over 5 years. Summary View of Ratings Criteria for Risk Targeted Multi-Asset Funds 4 ACE 3 ACE 2 ACE 1 ACE Displays excellent consistency & efficiency with the Dynamic Planner Asset & Risk Model over 3 years Displays very good consistency & efficiency with the Dynamic Planner Asset & Risk Model over 3 years Displays excellent consistency & efficiency with the DT Asset & Risk Model over shorter time periods Displays very good consistency & efficiency with the DT Asset & Risk Model over shorter time periods 10

11 Ratings Calibration In order to calibrate the ACE rating scores, DT applies a fixed set of hurdle rates for the combined PROT attribute scores. A lower hurdle rate is applied to multi-asset compared to single asset funds. In the former case, there is generally less ability for the manager to generate significant out-performance relative to the identified peer group, given the generally lower risk characteristics of the assets held. Based on our latest research (as at Jan 2016), from a screened universe of around 2000 funds, just under 400 passed the initial calibration and post quant screening process. Of these, DT have awarded 253 ACE ratings, representing just over 12% of the screened fund universe. The specific calibration results indicate 25 single asset and 22 multi-asset funds receiving the highest 4 ACE rating, representing excellence for both consistency and efficiency over the last 5 years. 11

12 Ongoing Review Frequency The DT Fund Research Team will conduct its investment screening and quantitative engagement process on an ongoing quarterly basis. We would expect a fund s ACE rating to apply for a full 12 month period, given the extensive quantitative analysis applied at the outset. However please note that we reserve the right to amend or even withdraw an ACE rating at any time should this become necessary. 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 Future development of the service Whilst this Guide explains in detail the ACE methodology applied for initial launch, over time our intention is to further develop the research scope to consider a potentially wider range of solutions and identifiable attributes.

13 Copyright Information in this document is subject to change without notice. Distribution Technology makes no warranty of any kind with regard to this manual, including, but not limited to, the implied warranties of merchant ability and fitness for a particular purpose. Distribution Technology shall not be liable for errors contained herein or direct, indirect, special, incidental or consequential damages in connection with the furnishing, performance, or use of this material. The software described in this document is furnished under a license agreement or nondisclosure agreement. The software may be used only in accordance with the terms of those agreements. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or any means, electronic or mechanical, including photocopying and recording for any purpose other than the purchaser s personal use without the written permission of Distribution Technology. Trademarks Distribution Technology may have patents or pending patent applications, trademarks, copyrights or other intellectual property rights covering subject matter in this document. The furnishing of this document does not give you any license to these patents, trademarks, copyrights or other intellectual property rights except as expressly provided in any written license agreement from Distribution Technology. All other companies and product names are trademarks or registered trademarks of their respective holders. 13