SRRI EUROPEAN OVERVIEW

Transcription

1 SRRI EUROPEAN OVERVIEW MAY 2012 INTRODUCTION The first review of Synthetic Risk and Reward Indicators (SRRIs) across the European funds industry, this report provides details of the proportion of funds in different risk bandings. As part of the new Key Investor Information Document (KIID), ushered in to replace the Simplified Prospectus as part of UCITS IV, all UCITS investors will be provided with an SRRI. The European Securities and Markets Authority (ESMA) stated in July 2010 (in document CESR/10-673) that the methodology for the SRRI was tailored to cover the particular features of different types of fund and, in particular, to satisfy the following criteria and objectives: provide investors with a meaningful indication of the overall risk and reward profile of the UCITS; ensure an appropriate spread of UCITS across different risk classes; be applicable to all types of UCITS; leave no room for manipulation; enable easy and cost-effective implementation by UCITS providers; be easily understood by auditors, advisers and distributors; enable easy and effective supervision by regulators; and achieve an adequate degree of stability in the risk classification process with respect to normal trends and fluctuations of financial markets. AUTHOR: ED MOISSON HEAD OF UK & CROSS-BORDER RESEARCH, LIPPER ed.moisson@thomsonreuters.com This report examines the SRRIs for all mutual funds and ETFs in Europe that have sufficient historical data upon which this risk measure is based. As not all companies yet publish KIIDs, Lipper s calculated SRRI has been used, providing a consistent and independently-calculated figure 1. This figure mirrors ESMA s recommended five year annualised volatility measure, in each fund s local currency, using weekly sub period intervals, which is then translated into category bandings 1-7 (with 1 representing the lowest level of volatility and 7 the highest level of volatility). Over 21,400 funds/share classes are covered by the current report, with calculations based on the five year period ending 31 March For any fund with multiple share classes, only the one identified as the primary class was included. The universe of funds analysed includes all open-ended mutual funds and exchange-traded funds in eighteen European domiciles. Funds do not have to be UCITS to be included in the current analysis. 1 This is a dynamic calculation that may be performed on any fund in the Lipper for Investment Management database. AUTHOR: KEVIN POLLARD RESEARCH ANALYST, METHODOLOGY, LIPPER kevin.pollard@thomsonreuters.com Please note that the views expressed in this document are intended as non-consultative and do not constitute legal advice. Thomson Reuters 2012 All Rights Reserved. This document is for information purposes only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any security of any entity in any jurisdiction. No guarantee is made that this information is accurate or complete and no warranties are made with regard to the results to be obtained from its use. In addition, Lipper will not be liable for any loss or damage resulting from information obtained from Lipper or any of its affiliates.

2 FIGURE 1 EQUITY FUNDS BY SRRI BANDING IN EUROPE SRRI 1 SRRI 2 SRRI 3 SRRI 4 SRRI 5 SRRI 6 SRRI 7 FIGURE 2 BOND FUNDS BY SRRI BANDING IN EUROPE SRRI 1 SRRI 2 SRRI 3 SRRI 4 SRRI 5 SRRI 6 SRRI 7 2

3 OVERVIEW 49.3% of all funds analysed fall within SRRI bandings 6 or 7, largely reflecting the proportion of the European universe that is made up of equity funds. 31.7% of funds fall within bandings 3 and 4, where most bond funds are categorised. Inevitably a closer look needs to be taken at the proportion of funds within different asset classes that have experienced different levels of risk. Figure 1 provides an overview of equity funds SRRI bandings, with 94.5% of funds falling in bandings 6 or 7 (58.8% and 35.7% respectively). For bond funds, figure 2 shows that 74.4% sit in bandings 3 or 4 and a further 11% in each the bandings just above and below this (i.e. 22% in 2 or 5). As the analysis below will illustrate, it is no surprise to find that the vast majority of funds that sit outside bands 3 and 4 are either short-term bond funds (less risky) or emerging market or high yield funds (more risky). So at once these findings illustrate that the vast majority of funds within the two main asset types sit within just two SRRI bandings each. So the volatility of funds performance falls broadly within a narrow range of the SRRI bandings that ESMA has defined. Beyond giving retail investors clarification that bond funds typically behave differently from equity funds in this regard, those investors who are aware of the main groupings (i.e. 6 or 7 for equities and 3 or 4 for bonds) may well find it useful to see whether a fund they are considering does not fit within these norms. REUTERS/ TAREK MOSTAFA LIPPER-EFA KIID PREMIUM SOLUTION Lipper-EFA KIID Premium Solution is a comprehensive, fully integrated and high quality KIID publication and management service that brings together Lipper s depth of experience in fund data management and analysis with European Fund Administration s (EFA) expertise in producing regulatory financial reports. This solution is a fully integrated KIID production and distribution service requiring minimum effort from the asset manager to comply with UCITS IV requirements. Lipper will provide the required data and calculations necessary for the set-up and ongoing monitoring of the KIID. EFA will manage the production and publication of the KIIDs including assistance and advice in setting up the document, validation and monitoring, high quality translation, document storage and distribution through different sales channels. 3

4 FIGURE 3 EUROPEAN FUNDS IN SELECTED LIPPER GLOBAL CLASSIFICATIONS BY SRRI BANDING SRRI 1 SRRI 2 SRRI 3 SRRI 4 SRRI 5 SRRI 6 SRRI 7 Eq Emg Mkts Eq Asia Pac Eq Eur Sm Cp Equity Europe Equity Nth Am Equity Japan Equity Global Equity UK Mixed Flex Mixed Aggr Mixed Bal Mixed Con Abs Ret High Abs Ret Med Abs Ret Low Bd Emg Mkts Bond Global Bond USD Bond Corp Bond CHF Bond EUR Bd Sht Tm Mny Mkt 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 4

5 LIPPER GLOBAL CLASSIFICATIONS Drilling down further, some of the largest classifications (by number of funds) have been selected to establish in more detail how SRRIs can vary not only between different classifications, but also within groups of broadly similar funds. Figure 3 provides more detail on how the concentration of equity and bond funds in different bandings clearly varies by their regional investments. For example, emerging market bond funds fall mainly in SRRI bands 4 (29.7%) and 5 (66.9%) unlike any other classifications featured here (if anything, these funds exhibit an aggregate risk profile more akin to Mixed Balanced funds). At the other end of the risk spectrum for fixed income, 61.1% of short-term bond funds sit in SRRI band 2 and 14% in band 1. Within the realm of equity funds, there is a distinct contrast between UK equities (93.1% in band 6) and Emerging Market or Asia Pacific equities (73.2% and 66.5% respectively in band 7). While these findings cannot claim to provide a definitive guide to the riskiness of different types of equity fund, it remains helpful for prospective investors to know where the bulk of similar funds sit. REUTERS/YURIKO NAKAO Rounding out this picture, mixed asset funds differing exposure to bonds and equities result in different SRRI bandings and, as anticipated, an aggregate risk profile generally although not always unlike either equity or bond funds. Lipper classifies mixed asset funds investing less than 35% in bonds and more than 65% in equities as Aggressive. Funds with the reverse weighted holdings are classified as Conservative. Funds with a balance between these two weightings are classified as Balanced. Finally, those mixed asset funds with weightings between asset classes at the discretion of the manager are described as Flexible 2. Finally, for absolute return funds, the wide variation in SRRI bandings all the way from 1 to 7 between funds seeking absolute returns highlights the inevitably diverse strategies and investments that this broad categorization encompasses. If any investors were still under the illusion that absolute return necessarily equated to low risk or low volatility, then these findings will help to shatter this. Lipper breaks down absolute return funds by currency reflecting the returns targeted by each fund as well as by Value at Risk (VaR) to measure the risk associated with the absolute return strategy employed but without assuming normally distributed returns (as would be the case using standard deviation). The findings in figure 3 highlight the usefulness of such an approach. 2 Funds within the Mixed Asset EUR classifications shown here all invest globally. 5

6 FIGURE 4 UK FUNDS IN SELECTED IMA SECTORS BY SRRI BANDING SRRI 1 SRRI 2 SRRI 3 SRRI 4 SRRI 5 SRRI 6 SRRI 7 China/Grtr China Global Emg Mkts Asia Pac Ex Jap Europe Ex UK North America Global Japan Global Equity Inc UK All Cos UK Smaller Cos UK Equity Inc Flexible Inv. Mixed Sh. Mixed Sh. Absolute Return Global Bonds High Yield UK Gilt Corp Bond Strat Bond Money Market Sht Tm M.Mkt 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 6

7 CLOSER LOOK AT THE UK Lipper s calculation of SRRIs enables a closer look at the UK funds industry, specifically those funds in the most popular Investment Management Association (IMA) sectors. Figure 4 highlights that equity funds are more commonly to be found in band 6 than for the wider European industry, with seven equity fund sectors having between 86% and 97.9% of their funds in the lower band, with the three sectors investing in UK stocks at the higher end of this range. Funds with an SRRI of 7 are truly in a minority here. This does throw up some interesting variations, which prompt questions that were raised when the SRRI methodology was first developed: what is the most appropriate way to measure risk for retail investors, or what do investors understand by risk? For example, funds investing across Europe (ex-uk) have a greater proportion of funds ranked 7 (38.5%) than those seven classifications noted above, most likely reflecting market volatility in recent years. REUTERS/STEFAN WERMUTH This leaves Asian and Emerging Market funds at the highest end of the SRRI scale, with the proportion of funds in bands 6 and 7 similar to those in these categories for the wider European industry. On the fixed income side too, investors in IMA sector funds are faced with a more clear-cut picture when comparing SRRIs. Across Strategic Bonds (75.9%), Corporate Bonds (91.7%), UK Gilts (78.3%) and High Yield (68.4%) a consistently high proportion of funds are in SRRI band 4. (For the Europe-wide analysis, band 3 was more common among bond funds, albeit not precisely the same sectors as in figure 4). For Mixed Investments 3, it is interesting to see that the IMA s Flexible category bears the signs of a significant proportion of managers holding a high proportion of equities (reflected in SRRI band 6). Finally, the diverse strategies currently included in the Absolute Return 4 sector are brought to light here, with risk bands ranging from 2 to 6, although 48.9% of these funds have an SRRI of 3 (with 19.1% of funds in band 2 and 23.4% in band 4). If nothing else, regardless of asset type, the vast majority of these absolute return funds have delivered lower volatility (as measured by the SRRI) than bond, mixed and equity sectors. 3 It is worth noting that the revised Mixed Investment sectors only came into being in January Absolute Return funds have been included to provide as rounded a picture as possible, although it is worth noting that the IMA states that performance comparisons are inappropriate for this sector, due to the diverse nature of the objectives of the funds. 7