INVESTMENTS
An immediate barrier is that data on methodologies and volatilities may not be readily accessible . Instead , we can look at funds ’ track records if their lifespan is long enough . One option is to look at funds ’ underlying exposures through time . To build a peer group , we can track whether a group of funds maintains similar exposures or holds combinations of exposures conducive to similar levels of expected volatility . Another route is to group funds according to a metric based on realised returns , such as the standard deviation of returns , through time ( if the similarity persists ). One caveat here is that one asset mix may have a different short-term volatility to another , but the forecasted volatility of a longer-term investment may be similar . We can go further still . By using a common metric ( such as one or more of those proposed above ) across all funds , and discovering how each rewarded its investors for the risk they had taken , this presents advisers and investors with a methodology to compare funds within the sector . Interestingly , this also allows us to see how incremental risk is compensated within fund families , and how this compares with other fund suites .
What does this analysis show ? Using the approach described above , here is the outcome plotted on a graph .
It blends the returns and volatilities of all funds within IA Volatility Managed over the last five years ( to 30 November 2021 ). The five Horizon Multi-Asset funds are shown in black . In any analysis that includes historical data , it is important to remember that each portfolio manager considered the circumstances and opportunities of the time ( and markets reacted to those conditions ), so comparisons and analysis based on past circumstances may not be representative of current ones . However , with the IA considering how it can apply performance metrics to the Volatility Managed sector , custom benchmarks are advisers ’ best chance of understanding outcomes for clients invested within it .
In summary
• The IA Volatility Managed sector contains both single funds and fund families that target various levels of volatility , as well as funds using different volatility methods , giving a broad range of risk and return outcomes .
• In the IA ’ s own words , advisers and investors should therefore not use the sector average for comparing fund performance as this would not give a like-for-like comparison .
• Building custom benchmarks is complex , but possible , by looking at funds with similar methodologies and levels of volatility over time .
• Using the Sharpe ratio , this provides one possible way of comparing funds within the Volatility Managed sector .
Horizon funds , reclassified On 5 November 2021 , Embark Investment reclassified its Horizon fund range from the Investment Association ( IA ) Mixed Investment sector to the IA Volatility Managed sector , and changed the funds ’ asset allocation guidelines and prospectus . The funds ’ new home better reflects their outcomes-based approach , while the change to the guidelines allows for greater investment flexibility . Find out more about the changes at embarkinvestments . co . uk / changes-to-funds-prospectus /
Past performance is not necessarily a guide to future performance and the value of investments ( and any income from them ) can go down , so an investor may get back less than the amount invested . No guarantee is given for the performance of the fund .
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