Levendi fund risk rating
A key part of current regulation is that manufacturers and distributors need to ensure that any product is suitable and appropriate for the investor. A significant element of this process is to ensure that the risk of a product matches the investor’s attitude to risk. The new regulations are very prescriptive. They require manufacturers to generate a document which describes the fund which must be used by Distributors and given to investors before they buy the fund. This document includes a risk rating for each product. This independent risk rating MUST be used to describe the risk of a product. Distributors can use other risk ratings as well, but these must be supplementary to the rating defined in the regulations.
The Levendi Thornbridge Defined Return Fund has an SRRI of 4 out of 7. This equates to a level of volatility of between 5% and 10%. Based on realised volatility the Fund would have a Dynamic Planner risk rating of 3 and a Defaqto Risk Rating of 2. Please see the Important Note Below
KIIDS AND KIDS
The regulations mean that the summary documents that distributors must use are changing. For funds which existed before the new regulations came into effect, the document that must be used now is a Key Investor Information Document or KIID. This includes a section where the risk of a product is ranked from one to seven on a scale called the SRRI.
For new funds, and for older funds from January 2022 onwards, the KIID will be replaced by a KID or Key Information Document. This also required that the product is ranked on a risk scale of one to seven. The new scale is now called the SRI or Synthetic Risk Indicator, and to confuse matters further, the scale is different.
SRRI AND SRI VERSUS INDEPENDENT RISK RATING
Many advisers use independent risk ratings to supplement the ratings that regulation requires them to use. The two main providers are Dynamic Planner and Defaqto.
An exact apples to apples comparison between the SRRI/SRI and the independent risk ratings is not possible because of the differences in the way the risk ratings are calculated. The way the SRI and SRRI are calculated has been published, but the detail of independent risk rating processes is proprietary and confidential. However, in order to facilitate a broad comparison of the SRRI and SRI with the independent risk ratings it is possible to compare the scales used using the volatility bands used to define the scales.
The chart below shows the 1-10 scales used by Dynamic Planner and Defaqto with the 1-7 scales used to calculate the SRRI and SRI.
LEVENDI RISK RATING
The SRRI and SRI, are independently calculated risk ratings using a process that is required by regulation. The Levendi Thornbridge Defined Return Fund has a KIID.
- SRRI; In the KIID the fund has an SRRI of 4 out of 7. This equates to a level of volatility of between 5% and 10%.
- SRI; In preparation for the new KID the SRI has been calculated as 3 out of 7, this equates to a level of volatility of between 5% and 12%.
We can see from the chart above that if the independent risk rating agencies used a process to calculate the volatility of the Fund that was like the SRRI or SRI this would equate broadly to the following;
- Dynamic Planner rating of between 3 and 6
- Defaqto rating of between 2 and 5
Since the Fund has been launched the realised volatility has been less than 6%. The Fund includes a risk management overlay which is used specifically to control volatility. If the Fund maintained this level of realised volatility the risk rating would be
- Dynamic Planner rating of 3
- Defaqto rating of 2
This note is intended to provide a very broad link between the official risk rating that must be provided to investors and the risk rating used by many advisers.
The Fund has not been risk rated by either Dynamic Planner or Defaqto. The nature of the fund means that neither risk rating agency can provide a risk rating. The analysis above is based on publicly available information about the volatility ranges that each firm uses to rate funds. However, we do not know how either firm calculates the volatility of a fund.
The contents of this document are communicated by, and the property of, Levendi Investment Management Ltd. Levendi Investment Management Limited Ltd is an appointed representative of Thornbridge Investment Management LLP which is authorised and regulated by the Financial Conduct Authority (“FCA”). The information and opinions contained in this document are subject to updating and verification and may be subject to amendment. No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by Levendi Investment Management Ltd or its directors. No liability is accepted by such persons for the accuracy or completeness of any information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this document. The information contained in this document is strictly confidential. The value of investments and any income generated may go down as well as up and is not guaranteed. Past performance is not necessarily a guide to future performance.