The benefits to advisers and their clients of using risk ... · would involve tactical asset allocation (TAA)) • Blended – significant positions can be held in both active and

The benefits to advisers and their clients of using risk bound fund families

October 2019

Accredited bySponsor

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ContentsIntroduction 3

Learning objectives 4

PART 1: Overview of multi-asset risk bound fund families 5

Understanding the universe of multi-asset funds 6

Risk bound fund families 9

A rating framework for selecting risk bound funds based on quality

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Selecting risk bound funds based on suitability 12

Benefits of using risk bound fund families 15

Test yourself for CPD purposes 16

Learning objectives and answers 17

PART 2: Prudential PruFolio Risk Managed fund range 18

Prudential Risk Managed Active 22

Prudential Risk Managed Passive 29

Prudential Risk Managed PruFunds 37

Charges 44

How can the PruFolio funds be accessed? 45

Conclusion 46

Appendix A – Smoothing process 47

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IntroductionIn recent years, with the market volatility we have seen, there has been a shift in investors’ primary focus from being on return, to being on risk. This document will take a closer look at the multi-asset funds universe and, in particular, risk bound funds.

These funds exist as ‘families’ – normally four or five funds run by the same fund management team and following the same investment process, but with expected return and risk for each fund increasing across the family. Risk bound funds aim to maintain a risk level, or match a specific profile, over time. Doing this successfully requires the fund to adapt to market movements by adjusting the asset allocation. Even with the volatility of the market, the risk profile of a risk bound fund should remain fairly consistent, enabling advisers to align the risk attitude of their clients to the funds.

An adviser making decisions about which investment proposition is suitable for a client’s needs will initially have undergone a lengthy process of discovery with regard to their client. Specifically, they will look at the client’s objectives and their attitude to risk. They will then research how best to meet the client’s needs. When looking at investment solutions, many advisers will look at collective investment scheme solutions and specifically multi-asset funds.

We have split the document into two parts:

Patrick Norwood Investment Consultant [email protected]

Part 1Overview of multi-asset risk bound fund families

We provide a regulatory update, an overview of the multi-asset fund universe and a framework for rating and selecting risk bound funds and fund families from both a quality and suitability point of view. This part is accredited for continuing professional development (CPD).

Part 2Prudential PruFolio Risk Managed fund range

We look at Prudential’s Risk Managed Active, Risk Managed Passive and Risk Managed PruFund ranges as examples of risk bound fund families. We consider the investment process behind them; the asset allocation, risk level and performance for each fund; plus how the fund families can be accessed.

mailto:pnorwood%40defaqto.com?subject=

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Learning objectivesThis document is accredited by the CII/PFS and CISI for up to 30 minutes of structured CPD.

Reading this publication will enable you to:

1 List the latest regulatory developments in the asset management industry

2 Identify the different ways in which the multi-asset fund universe can be broken down

3 Describe what risk bound multi-asset funds are, how they work, how they can be used and how their sub-set risk targeted market has grown over the last few years

4 Describe how risk bound funds can be rated from both a quality and suitability point of view

5 Understand the benefits of risk bound funds to advisers and their clients

AUM Assets under management

D2C Direct-to-consumer

DNA Data numeric analysis

EGR Expected growth rate

LTIS Long-Term Investment Strategy

NURS Non-UCITS retail scheme

OCF Ongoing charges figure

OEIC Open-ended investment company

QSL Quarterly smoothing limit

SAA Strategic asset allocation

TAA Tactical asset allocation

T&IO Treasury and Investment Office

UCITS Undertakings for collective investment in transferable securities

Acronyms

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Regulatory update The introduction of MiFID II in January 2018 requires buy-side firms to pay for research as an unbundled product, separate from other broker services.

At the same time, the FCA introduced their new Product Intervention and Product Governance Sourcebook, more commonly known as Prod rules. These require advisers to have a process in place to make sure their client is in the target market for the products they recommend.

The information that they should be using to define the target market for these products falls into the following categories:

• client type

• their knowledge and experience

• the client’s financial situation

• their risk tolerance

• their investment objectives

• and their needs.

In addition, advisers need to check that the target market is still appropriate on a regular basis.

From an investment management firm point of view, their products should:

• meet the needs of one or more identifiable target markets

• be sold to clients in the target markets by the appropriate distribution channels

• deliver appropriate client outcomes.

In April 2018, the FCA published its policy statement announcing its feedback and final rules on its 2017 Asset Management Market Study. The FCA produced a list of expectations for the asset management sector, as well as putting in place new requirements regarding value for money, independent directors and box profits.

In May 2018, the General Data Protection Regulation (GDPR) came into force. This is designed to modernise laws that protect the personal information of individuals. It also boosts the rights of individuals and gives them more control over their information.

In July 2018, the FCA took its first steps in addressing potential consumer harm arising from pricing complexity and a lack of transparency in direct-to-consumer (D2C) investment platforms, as part of a proposed package of remedies dealing with competition issues in this area. In the interim report following its 2017 Investment Platforms Market Study, the FCA said it found low levels of satisfaction regarding price competition among users of D2C platforms.

In the final report in March 2019, the FCA set out a package of measures to help consumers who invest through investment platforms more easily find and switch to the right one for them. The package includes proposed FCA rules and actions for the industry to take forward.

Part 1: Overview of multi-asset risk bound fund familiesThis section discusses the main regulatory events over the last year that are most likely to be relevant to readers.

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Understanding the universe of multi-asset fundsIdentifying the appropriate strategyMulti-asset funds come in various forms. Our ‘quadrant’ chart below offers a framework to help advisers identify the key investment characteristics and the positioning of each multi-asset class investment fund.

Risk bound

Risk targeted

Risk focused

Multi-asset fundsTraditional

Active

Passive

Active/Passiveblend

Alternative (and traditional)

Multi-manager

Fund of funds

UnfetteredFettered

Manager of

managers

Single-manager(direct)

Return focused

Investment style

Management approach

Asset type Investment method

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1. Investment style

Multi-asset funds can be either:

• Risk bound – existing as ‘families’ (sets of funds), with either each fund in the family targeting a certain numerical level or range of risk, and return being the secondary aim (risk targeted); or with each fund having more emphasis on return but being constrained by risk in some way, eg through the Investment Association sector it sits in (risk focused)

• Return focused – funds primarily aim to outperform a benchmark (ie FTSE 100) or a sector (ie UK All Companies), with risk being the secondary consideration

2. Management approach

Multi-asset funds may be:

• Single-manager – one fund manager or team manages all the investments in the fund

• Multi-manager – different fund managers are used across and sometimes within the various asset classes

The rationale for multi-manager investing is that no one manager can be the best across every single asset class and, instead, one should seek out a specialist manager for each different area. The disadvantage of this approach is that by employing other managers, an extra layer of fees will be introduced, making multi-managers more expensive on average.

Multi-manager funds may be either:

• Manager of managers – a mandate will be set up with the sub-fund manager and run on a segregated basis

• Fund of funds – the multi-asset manager is buying and selling all or part of its underlying funds

Fund of funds may be either:

• Fettered – the multi-asset fund manager can only use funds from elsewhere within their organisation

• Unfettered – funds from any firm may be used

The big advantage of unfettered is that the opportunity set is much larger, not only in terms of funds but also investment styles and strategies, with the result that the manager should be able to achieve greater diversification. With fettered funds, however, costs will usually be lower, and the multi-asset manager will have more detailed access to the underlying fund managers. Also, monitoring fewer managers allows for greater concentration on the individual manager.

3. Asset type

Multi-asset funds may be:

• Traditional asset funds – investments are long only and in the ‘traditional’ asset classes of equities, bonds, cash and property

• Alternative (and traditional) asset funds – investments are a combination of traditional asset classes and ‘alternative’ assets, such as private equity and infrastructure

Alternative asset classes offer greater potential for higher returns and diversification; however, they can also be more risky and expensive, lack liquidity and be less transparent.

4. Investment method

Finally, multi-asset funds can be:

• Active – the underlying managers attempt to generate returns in excess of the stated benchmark/index, although there is the risk of them underperforming it

• Passive – the underlying funds simply aim to track the benchmark/index and will normally be much less expensive. Allocation between the funds will be made on a long-term basis using a strategic asset allocation (SAA) and there is no short- or medium-term active allocation (short- to medium-term here means an investment horizon of roughly one to five years and would involve tactical asset allocation (TAA))

• Blended – significant positions can be held in both active and passive funds and/or the fund manager is able to invest in each. In addition, this includes funds holding entirely passive funds but where the fund of funds manager has the freedom to make TAA weightings

As can be seen, Defaqto’s framework focuses on four key themes:

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Evolution of investment solutionsInvestment solutions have evolved considerably over the last couple of decades, in several different ways. As already mentioned, there has been a shift in the focus from being on return to being on risk, while the number of asset classes available has increased to include ‘alternative’ assets. In addition, portfolio construction used to focus almost exclusively on asset class diversification. Nowadays, however, allocation is often across the underlying risk (or other) factors. Also, the use of derivatives and other similar instruments has increased.

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In other words, younger investors in the accumulation phase would be expected to use the higher risk funds in the family, with their corresponding higher levels of expected return. Older investors approaching retirement or already in the decumulation phase, meanwhile, will tend to use the lower risk funds, accepting their probable lower expected returns (although it should be noted that more commentators are now saying that decumulation portfolios need a reasonable level of equity exposure, and therefore risk, to mitigate longevity risk).

One advantage of risk bound fund families, therefore, is that if the investor’s circumstances change, they can simply move up or down the risk scale accordingly to a different fund within the same family that is more suitable. The adviser will have a reduced amount of due diligence to carry out in terms of finding a new proposition, as this will have been done at the start. As a result, the investor could be in the same fund family for most if not all of their lifecycle.

The funds within each family will usually be managed by the same person or team and follow the same investment process, with the different levels of risk being achieved mainly through varying the asset allocations across the family.

This will also be achieved, to a lesser extent, by selecting different underlying funds or managers.

The risk targeted fund market grew strongly in the years immediately before and after the UK retail distribution review of 2012–13. Advisers’ focus shifted to client suitability and investment outcomes (see Chart 1), with the adviser determining a client’s attitude to risk and their capacity to accept losses and then recommending appropriate solutions based on those measures.

The other reason for the strong growth in the risk targeted market in the latter parts of the last decade and early years of this decade was the huge ‘credit crunch’ related market volatility observed around 2008. This was seen by many as a watershed where investors’ primary concerns shifted from generating the best return possible, to risk and protection of capital.

In the last five or so years, however, this growth has slowed, most likely due to pension freedom reforms, which mean that retirees are no longer forced to buy an annuity. As a result, advisers and providers have become more focused on income-producing outcomes in the retirement segment of the market.

Chart 1: Growth in the risk targeted market

Number of families Number of family members

5 5 7 8 9 16 17 25 29 32 35 39 39 39 41 42 43

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

18 21 27 3340

6870

114

137149

166185 184 184 194 197 206

Source: Defaqto, February 2019

Risk bound fund familiesIn the case of risk bound, there are on average four or five funds in a family, with each fund in the family being used by different investors, depending on their risk tolerance and the point in their investment lifecycle.

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A rating framework for selecting risk bound funds based on qualityDefaqto introduced Diamond Ratings to help advisers and investors navigate the fund universe by providing an independent assessment of where funds and fund families sit in the market.

In scoring multi-asset and other types of funds, we apply a data numeric analysis (DNA) methodology, with each fund feature and performance attribute being scored from 1 to 5, where 5 indicates the best possible characteristic (top quintile) and 1 indicates the worst characteristic (bottom quintile). We divide funds into different universes when doing this, so that we are comparing like with like.

The sum of the individual DNA scores across the range of fund features and performance attributes provides an overall score, which we use to rank each fund or fund family within its respective universe and then give it a Diamond Rating of 1 to 5.

Under our standard methodology for rating risk bound fund families (which applies to those with five or more years of performance data), all families are rated on their risk-adjusted performance, as measured by Defaqto’s proprietary ‘risk-adjusted alpha’. This is defined as:

The fund’s actual return

The return expected for the amount of risk taken over the measurement period

Expected return is determined from Defaqto’s Risk Ratings (see next section) – each level will have an associated volatility and return. The risk versus return of the Risk Ratings is plotted on a chart and a curve of best fit is produced. From that curve, there will be an expected return corresponding to a given volatility, and the fund’s actual return will be either above or below that. The average risk-adjusted alpha is taken across the family.

We then look at family ‘risk shape’ as part of our Diamond Rating for risk bound fund families, which consists of three different proprietary measures of how the funds in the family behave in relation to one another:

• Spread – the range of risk available in the family of funds, calculated as the difference in risk between the maximum and minimum risk fund, with a wider spread being seen as better

• Consistency – how even the increases in risks are when moving between one fund and the next, calculated as the variance of these changes in risk, with a lower variance (ie more even steps in risk) being rated as better

• Shape – according to investment theory, if investors take extra risk, they should be rewarded with higher returns, at least over the medium to long term. Shape measures the conformity of the family of funds to this expected positive relationship between risk and return, with a closer fit to this pattern receiving a higher score

The weightings on each of these are doubled to give performance and risk shape a higher impact on the overall rating.

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Newer fund families

Where there is no performance data, or data of less than a year, we instead rate the fund family through at least one due diligence meeting with the fund manager on the following five criteria:

• Business strength – including ownership stability, financial strength, ability to deal with business growth and key person risk

• Staff quality – experience and skills of the team members, in particular the key decision-makers, team stability, how well the team is incentivised and staff turnover

• Investment philosophy – is there anything unique about the manager’s beliefs and philosophy? Can they be translated into excess returns (alpha)? If so, in what type(s) of market are they likely to do well?

• Investment process – is it clear, understandable, well thought out and consistent with the philosophy? How does the manager research and select investments? How do they put portfolios together and what are their sell disciplines? How do they analyse and manage risk?

• Research capability – level and type of resource, in particular the size of the research team

Where there are between one and five years of performance numbers, this part of the ratings will be a mix of the performance/risk shape and the due diligence scores.

Additional features

Our Diamond Rating scoring methodology also takes into account the following additional features, and these are looked at in the same way regardless of the age of the family:

• Number of funds in the family – more funds in the family is seen as better, as it means that advisers can more closely align a fund’s objectives to the needs of a particular client

• Family assets under management (AUM) – needs to be above a minimum level to be economically self-sustaining, plus size of AUM is an indicator of total resources available to the funds

• Manager tenure – managers with greater experience of managing the fund family are a likely indicator of achieving the fund objectives in the future

• Ongoing fund charge – a lower charge is less of a drag on performance

• Undertakings for the collective investment of transferable securities (UCITS)/Non-UCITS retail scheme (NURS) status – funds that operate under a UCITS structure have greater controls over risk management and reporting

• Domicile – funds registered within the UK will enable investors to access the Financial Services Compensation Scheme, if necessary, and avoid potentially complex tax implications

These features receive no extra weighting when adding up their DNA scores, resulting in the overall Diamond Rating attribution in Chart 2. In this chart number of funds in the family, family AUM, manager tenure, UCITS/NURS status and domicile are grouped into ‘other features’.

Charges

Other features

Performance / due diligence scores

Risk shape / due diligence scores

7.1%

35.7%

14.3%

42.9%

Chart 2: Diamond Rating attribution

Source: Defaqto, February 2019

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Selecting risk bound funds based on suitabilityDefaqto researches funds and portfolios in detail to assign them a Defaqto Risk Rating, with each rating corresponding to a Defaqto Risk Profile.

These ratings are reached by:

• Looking at the fund’s past volatility (standard deviation) of returns over 1, 3, 5 and 10 years, where that data exists

• Looking at the fund’s projected volatility using its asset allocation and assumptions for the future returns, volatilities and co-movements of the asset classes it holds

• Discussing these numbers with the manager of the fund

Defaqto’s Risk Ratings allow advisers to assess multi-asset funds in terms of their risk and hence suitability for each client.

The perceived risk of each fund, normally the highest of the past and projected volatilities, is mapped onto a scale of volatility bands, where 10 is the most risky and 1 is the least risky (cash), to give the fund its Defaqto Risk Rating.

Defaqto risk profilingAdvisers tend to undertake the following process in selecting a suitable investment strategy:

3Research suitable

investments21 Agree a risk profile

Understanding the client's objectives

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The adviser will then need to assess the client’s attitude to risk and will likely do this by asking the client to complete a questionnaire to determine their natural risk level on a scale of, for example, 1 to 10, where 1 is the lowest risk and 10 is the highest.

They should also discuss the client’s capacity for loss, which will explore how much capital they can afford to lose that will not materially affect their standard of living, while still meeting their financial goals. Capacity for loss can be described as the client’s ability to absorb falls in the value of their investment if any loss of capital would have a materially detrimental effect on their standard of living.

Required return can often be the most dominant assessment criteria. How much will be invested and for how long? Is there a regular investment (how much and how often)? If the return (growth and/or income) required can be achieved by having to tolerate less overall volatility and risk, then there is no need to invest in a combination of assets beyond a particular risk level, even if the investor’s attitude to risk indicates a higher level of risk would be acceptable to them.

Once the adviser understands the client’s investment amount, required term, natural risk level and capacity for loss, they will work with the client to identify an agreed risk level, also on the scale of 1 to 10, where 1 is the lowest risk and 10 is the highest. This may be different from the client’s natural risk level and may also be different from other investments, eg retirement saving compared with investing a windfall. This agreed risk level helps determine the client’s Defaqto Risk Profile for that investment.

By defining a particular level of risk to take (and thus a commensurate combination of assets), one can assess whether the individual’s financial situation is able to withstand the impact of a worst-case outcome, or a near worst-case scenario, based upon a given percentage probability of an event occurring.

Defaqto Risk ProfilesDefaqto has created ten Risk Profiles, which align to the client’s attitude to risk levels. The higher the risk profile, the greater the potential return but also the increased potential falls in value. Each Risk Profile includes a description of a typical investor’s attitude to investing. For each Risk Profile there is also an indication of the potential rises and falls in value over a 10-year investment term, to guide decisions.

Researching suitable funds or portfoliosAdvisers can use the Defaqto Risk Profile to review any existing investments and research the market for suitable funds or portfolios. They can then make recommendations, either using these risk rated funds or portfolios, or construct a separate portfolio depending on the client’s objectives.

It is worth noting that Defaqto’s Diamond Ratings rate risk bound funds as a family, often looking at how the funds behave in relation to each other; therefore, there will be just one rating for the whole family. Our Risk Ratings, however, rate each fund in the family on an individual basis, with each fund in the family almost always receiving a different Risk Rating.

It is also worth remembering at this point the difference between ‘risk targeted’ and ‘risk rated’ funds. ‘Risk targeted’ means a fund will aim to keep its volatility at a certain level or within a specific range, while ‘risk rated’ means that a fund has been assigned a rating based on its perceived risk, either by ourselves or one of the other providers in the market. Therefore, a fund can be either risk targeted or risk rated, or be both, or be neither.

Understanding the client's objectivesTo understand the objectives, the adviser needs to understand:

How much will the client be investing?

How long will they be investing for?

Will there be a regular investment

(how much and how often)?

What is the required return?

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Rory Percival reportIn late 2017, Rory Percival, former FCA technical specialist and now independent consultant, launched a risk profiling guide, having assessed six of the most popular risk profiling tools available in the market. Back in 2011, the FCA (or Financial Services Authority as it then was) found that 9 out of 11 of the market’s key risk profiling tools were working inadequately. Percival highlighted three key findings from his new research:

• Risk profiling tools have come a long way since the 2011 guidance, with him not considering any of the six tools to be fundamentally flawed

• There were, however, variations among the tools, particularly when it came to asset allocation. The asset allocation suggested in each tool varied significantly for each client’s risk level

• Tools had become more integrated into the advice process since 2011, when they were much more standalone

MiFID II regulation requires advisers to assess risk profiling tools to see whether they are fit for purpose, with the adviser then having to identify and mitigate any limitations they pose to the advice process.

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Younger investors in the accumulation phase would be expected to use the higher risk funds in the family, with their corresponding higher levels of expected return. Older investors approaching retirement or already in the decumulation phase will tend to use the lower risk funds, accepting their probable lower expected returns.

For the adviser, the benefit is that there is a reduced amount of due diligence to carry out in terms of finding a new proposition, as the majority of work will have been done at the start when researching the market and selecting the family.

Risk bound funds offer investors access to disciplined, well-resourced and process-driven solutions to manage and meet client expectations and attitude to investment risk. Risk bound solutions managed with discipline lend themselves to maintaining alignment with a client’s tolerance for loss, both now and in the future. In most cases, it is possible for the client to invest in the same family of funds throughout their investment lifecycle.

However, there can be significant differences in structure, process and other features across the various risk bound fund families in the market, so due diligence is still very important – such funds need to be monitored to ensure that they are meeting the client’s aims and objectives on an ongoing basis, as with any other fund.

Benefits of using risk bound fund familiesFor the investor, the benefit of these types of funds is their simplicity, as it is possible for a client to invest in the same family of funds throughout their investment lifecycle.

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Test yourself for CPD purposesTo assess your knowledge having read this publication, why not work your way through the following questions?

All the answers can be found within the text.

Q1 What do the FCA Prod rules require from advisers and investment management firms?

Q2 What are the primary concerns of the FCA with regard to direct-to-consumer investment platforms?

Q3 What have been some of the main trends in the evolution of investment solutions over the last couple of decades?

Q4 Can a risk bound fund family still receive a Defaqto Diamond Rating if it has little or no performance data, due to it being new?

Q5 What are the three pieces of information required from a client to determine their agreed risk level (and hence

their risk profile)?

Name

Signature

Date

CPD time recorded

CII/PFS and CISI accredit this document for up to 30 minutes of structured CPD.

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Answers

As a guide, your answers should include the following points:

1. These require advisers to have a process in place to make sure their client is in the target market for the products they recommend. In addition, they need to check that the target market is still appropriate on a regular basis. From an investment management firm point of view, their products should meet the needs of one or more identifiable target market, be sold to clients in the target markets by the appropriate distribution channels and deliver appropriate client outcomes.

2. Their primary concerns are complexity, lack of transparency, lack of price competition and it often being difficult for advisers and consumers to switch platform.

3. The main trends include:

• a shift in the focus of solutions from being on return to being on risk

• an increase in the number of asset classes used, in particular more ‘alternative’ assets

• portfolio construction often being based on the underlying risk (or other) factors instead of just asset class diversification

• the increased use of derivatives and other similar instruments

4. Yes.

5. The client’s natural risk level, required return and capacity for loss are needed.

Learning objectivesHaving read this document you will now be able to:

1 List the latest regulatory developments in the asset management industry

2 Identify the different ways in which the multi-asset fund universe can be broken down

3 Describe what risk bound multi-asset funds are, how they work, how they can be used and how their sub-set risk targeted market has grown over the last few years

4 Describe how risk bound funds can be rated from both a quality and suitability point of view

5 Understand the benefits of risk bound funds to advisers and their clients

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Part 2: Prudential PruFolio Risk Managed fund rangeThis part now considers Prudential’s Risk Managed Active, Passive and PruFund ranges and their potential suitability as solutions for clients.

Each range consists of five portfolios, with expected risk and return increasing through the family. All of these 15 funds form the PruFolio fund family. Sitting alongside the PruFolio Risk Managed range are the PruFund Cautious and PruFund Growth funds.

All of the PruFolio funds aim to achieve long-term total returns (ie provide a combination of income and growth of capital) by investing mainly in collective investment schemes. The number at the end of the name of the fund indicates the relative risk position, with 5 offering the highest potential risk and return and 1 the lowest. The funds were previously named by the amount of equities (as a percentage of the total portfolio) permitted. In addition to this renaming of the funds, a fifth PruFund was launched, at the highest of the five relative risk positions, on 21 January 2019.

All three ranges manage risk by limiting the volatility of each fund to be at or below a certain level. The funds in the Risk Managed PruFund range plus PruFund Cautious and Growth also involve some smoothing (see Appendix A).

The business and process behind the funds are described below.

Treasury and Investment Office (previously Prudential Portfolio Management Group)The Treasury and Investment Office (T&IO) are the in-house investment strategists and ‘manager of managers’ for Prudential in the UK. It is independent of the various underlying asset management businesses within M&G Group. It is responsible for approximately £170 billion AUM, as at 31 December 2018, across a range of multi-asset investment solutions and other Prudential products. The team is made up of around 60 members and is split into the following sub-teams:

• Long-Term Investment Strategy (LTIS)

• Portfolio Management

• Manager Oversight

• Alternatives

• Business Development

New fund name Old fund name

Risk Managed Active / Risk Managed Passive / Risk Managed PruFund 1 Dynamic / Dynamic Focused / PruFund 0-30




Risk Managed Active / Risk Managed Passive / Risk Managed PruFund 5 Dynamic / Dynamic Focused

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Investment processThe process can be broken down into:

• Strategic asset allocation (SAA)

• Tactical asset allocation (TAA)

• Fund selection and manager oversight

• Portfolio management

SAA

The LTIS sub-team recommends the SAA for each portfolio. As part of this they develop their own capital market assumptions for the expected returns, volatilities and correlations of the various asset classes covered. They then use an in-house economic scenario generator, ‘GeneSIS’, to carry out stochastic modelling based on these assumptions, which involves mapping out a full range of possible future asset allocations. The SAAs are determined from these potential portfolios using the following principles:

• Customer outcomes – ensuring that expected customer outcomes are mapped to the fund’s objectives

• Tailored risk appetite – that all portfolios have a bespoke SAA that is designed for their specific needs, with any particular constraints being taken into account

• Efficient risks and returns – for a given risk appetite, the T&IO choosing an asset allocation that generates the highest return

• Consistency across fund ranges – within the stated fund objectives and risk appetite, ensuring a consistent SAA across funds with a similar risk appetite and other similar funds

• Other constraints – reviewing any other constraints, such as cost and liquidity

Once the optimised SAA for each portfolio is created, it is then approved by the Investment Committee and any portfolio changes are implemented by M&G Investment Management.

TAA

TAA is where shorter-term house views around the SAAs can be reflected. These look 1–18 months ahead and are designed to focus on three types of mispricing opportunities:

• Macro – relating to economic and market fundamentals

• Valuation – based on views of appropriate valuation parameters for the various asset classes and sub-asset classes they cover

• Behavioural – resulting from short-term mispricing due to excess pessimism or optimism (leading to opportunity for ‘reversal’ trades) or a clear trend that is likely to be sustained (leading to opportunity for ‘momentum’ trades)

Decisions can be based on a combination of more than one of the above, and the group’s TAA investment philosophy is not to take a position unless they believe the mispricing to be significant or the opportunity has a high likelihood of being rewarded. In the cases of the Risk Managed Active and Risk Managed Passive ranges, the TAA is carried out by the T&IO. With the PruFunds, the M&G Macro team is utilised for the TAA.

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Fund selection and manager oversight

Fund selection is carried out across all three PruFolio ranges by the Manager Oversight team within the T&IO. The team also ensures the continued suitability of the underlying managers and assesses whether the mandates and funds held in Prudential’s multi-asset portfolios are performing in line with expectations.

The due diligence process combines quantitative factors, including measures of performance and holdings analysis, with qualitative analysis focused on the business, people, philosophy, process and infrastructure associated with the fund. The process operates at various different levels:

• Monthly monitoring – where the underlying managers’ key holdings and exposures are reviewed and a performance and attribution analysis is generated

• Quarterly strategy and performance review – the managers are met in person or by video, with each submitting a Data Request Book prior to this quarterly meeting, which provides the manager’s own performance data, risk metrics, market outlook and attribution

• Annual investment due diligence – the Manager Oversight team conducts onsite meetings with all of the underlying managers, covering investment activity and performance; interaction within and between the various investment teams; and other functions such as risk and operations

The differences in this part of the process across the ranges are summarised in Table 1.

Table 1: PruFolio – manager structure and asset classes used

Risk Managed Active Risk Managed Passive Risk Managed PruFund

Funds selected from

M&G Group, including Eastspring, and

selected external active managers

At least 70% passive vehicles plus active vehicles from M&G

Prudential’s With Profits Fund

investment universe

Equities Actively managed Passively managed Actively managed

Fixed interest Actively managed Hybrid, part passive / part active Actively managed

Property Held via funds No Held directly

Alternatives Yes Yes Yes

Portfolio management

Portfolio management responsibilities can be split into the following areas:

• Keeping the funds in shape – ensuring the portfolios are managed in line with target exposures and limits while minimising cost and risk, adhering to agreed target TAA positions, and managing cash flows and other fund dynamics

• TAA – reviewing tactical opportunities, determining changes in TAA positioning, and implementing and monitoring TAA exposures in conjunction with teams across the T&IO

• Implementation – ensuring changes in SAA and TAA are implemented effectively and efficiently

• Operational management – preparing and reviewing trade instructions to minimise operational errors

• Portfolio monitoring – reviewing on an ongoing basis exposures, risks and performance in conjunction with the T&IO Risk and Manager Oversight sub-teams

• Liquidity – managing and reporting on liquidity to ensure that outflows can be covered in stressed scenarios

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Defaqto risk assessmentTable 2 seeks to demonstrate where the Prudential Risk Managed Active, Passive and PruFunds sit in comparison to each other and on the Defaqto risk assessment tool (as mentioned earlier, each Defaqto Risk Rating is defined by a volatility band).

Once an individual’s attitude to risk, capacity for loss and required return have been considered, the agreed risk level tends to be most commonly graduated somewhere between levels 3 and 7. This is broadly the range and area of the market within which Prudential’s funds, as listed below, are positioned to try to match investor needs.

Table 2: Risk Ratings of Prudential’s funds

Each range and individual portfolio is now considered in more detail.

DefaqtoRisk Rating

Risk Managed Active

Risk Managed Passive

Risk Managed PruFunds

N/A

Risk Managed Active 5 Risk Managed Passive 5 Risk Managed PruFund 5


Risk Managed Active 3 Risk Managed Passive 3 Risk Managed PruFund 3, PruFund Growth


Risk Managed Active 1 Risk Managed Passive 1 Risk Managed PruFund 1, PruFund Cautious

High Risk

LowRisk

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Prudential Risk Managed ActiveWithin the multi-asset universeBased on the ‘quadrant’ multi-asset framework described earlier, Defaqto classifies Prudential’s Risk Managed Active funds as:

Multi-asset funds

Investment styleRisk bound

Management approach• Multi-manager• Fund of funds • Mainly fettered

Asset typeTraditional and

alternative

Investment method

Active

Defaqto Diamond RatingDue to recent changes announced in relation to the running of the Risk Managed Active family, in particular adding volatility ceilings to the funds and bringing all of the underlying fund research and selection in-house, this range has been treated as new, and the performance and risk shape scores have been replaced by the scores from Defaqto’s due diligence meetings with Prudential’s investment team.

In terms of the additional features, the average ongoing charges figures (OCF) is in the most favourable quintile of the rating peer group; this family has an above average number of funds in the range and large family AUM.

Overall, this family receives a Diamond Rating of 5.

For each individual portfolio, the following pages show: its objective, its asset allocation, its Defaqto Risk Rating, the type of investor likely to invest in it (based on the Risk Rating) and its historical performance.

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Risk Managed Active 1

UK Equity 7.13%Eur ex-UK Equity 3.37%US Equity 3.12%Japan Equity 1.40%Asia Pac Equity 3.56%EM Equity 1.24%Property 4.00%

Alternatives 3.00%UK & Eur FI 40.03%

Other FI 7.11%Asia FI 3.38%US FI 17.16%

Cash 5.50%

Source: Prudential, January 2019

ISIN code: GB00BF232388

Fund objective

The fund aims to achieve long-term (in excess of five years) total return (the combination of income and growth of capital) by investing in a mix of assets from around the world and aims to limit volatility over rolling five-year periods to 9%. The fund aims to achieve its objective through investing at least 70% in actively managed collective investment schemes.

Asset allocation

Typical investor

Investors at Risk Profile 3 tend to target a modest level of growth via a portfolio of mixed assets. Their portfolios will primarily be invested in fixed interest assets but also defensive equity and property so as to achieve relatively stable long-term returns. In the short term, they typically expect some volatility.

Historical performance

Source of performance data: Financial Express (FE). Please remember that past performance is not a reliable indicator of future performance. The figures are intended only to demonstrate performance history of the fund over the period shown. They take no account of product or advice charges. The application of charges may impact the overall performance. The value of your client’s investment can go down as well as up, and the amount your client gets back may be less than they put in.

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Cash 4.50%



Fund objective


Asset allocation

Typical investor

Investors at Risk Profile 4 tend to target a moderate level of capital appreciation by investing in a multi-asset portfolio. Their investments will be mainly in UK fixed interest securities, equities – in particular UK equities – and property. They typically expect a moderate amount of volatility.



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Cash 3.55%



Fund objective


Asset allocation

Typical investor

Investors at Risk Profile 5 tend to target longer-term capital growth. Their investments will be mainly in fixed interest, equities with a UK focus and also some ‘alternative’ asset classes, mostly property. They typically expect some volatility in return for the possibility of higher long-term returns.



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Cash 2.51%



Fund objective

The fund aims to achieve long-term (in excess of five years) total return (the combination of income and growth of capital) by investing in a mix of assets from around the world and aims to limit volatility over rolling five-year periods to 14.5%. The fund aims to achieve its objective through investing at least 70% in actively managed collective investment schemes.

Asset allocation

Typical investor

Investors at Risk Profile 6 tend to target a return using a portfolio with a higher equity content and a wider geographical spread. Their investments will be predominantly in UK and overseas equities, with an exposure to fixed interest and property in order to provide growth-orientated diversification. They typically accept some volatility in return for the possibility of higher long-term returns.



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Cash 1.50%


ISIN code: GB00BF232C79

Fund objective


Asset allocation

Typical investor

Investors at Risk Profile 7 tend to target long-term capital growth by adopting a higher risk level. Their investments will typically be in UK and overseas equities but also some ‘alternative’ asset classes, for the purpose of achieving long-term capital appreciation.



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RMA1 (0-30)

RMA2 (10-40)

RMA3 (20-55)

RMA4 (40-80)

RMA5 (60-100)

0-30 10-40 20-55 40-80 60-100

95

115

135

155

175

195

215

2010 2011 2012 2013 2014 2015 2016 2017

As can be seen from Chart 3, and as would be expected, over the period these funds have existed, realised returns and volatility across the fund family increase with the risk level of the fund. As mentioned earlier, these funds were up until very recently known as Prudential Dynamic Portfolios.

Source: Morningstar reinvested price series for P share class (Acc) rebased with January 2010, January 2019

Chart 3: Prudential Risk Managed Active fund family performance

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Prudential Risk Managed PassiveWithin the multi-asset universe

In terms of Defaqto’s multi-asset framework, Prudential’s Risk Managed Passive funds are seen as:

Multi-asset funds


Management approach• Multi-manager• Fund of funds• Mainly unfettered


alternative

Investment methodPart passive,

part active

Defaqto Diamond Rating

The Risk Managed Passive family has also been treated as new; therefore, the performance and risk shape scores have again been replaced by the scores from Defaqto’s due diligence meetings with Prudential’s investment team.

In terms of the additional features, this family has an above average (relative to the peer group) number of funds in the family, large family AUM and an average OCF in the most favourable quintile of the rating peer group.

Overall, this family receives a Diamond Rating of 5.

For each individual portfolio, the following pages show its objective, its asset allocation, its Defaqto Risk Rating, the type of investor likely to invest in it (based on the Risk Rating) and its historical performance.

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Risk Managed Passive 1

UK Equity 9.00%Eur ex-UK Equity 4.25%US Equity 3.94%Japan Equity 1.75%Asia Pac Equity 4.50%EM Equity 1.56%


Other FI 3.37%US FI 19.24%

Cash 5.50%


ISIN code: GB00BF232F01

Fund objective

The fund aims to achieve long-term (in excess of five years) total return (the combination of income and growth of capital) by investing in a mix of assets from around the world and aims to limit volatility over rolling five-year periods to 9%. The fund aims to achieve its objective through investing at least 70% in passive collective investment schemes (eg funds that track an index).

Asset allocation

Typical investor

Investors with a Risk Profile 3 tend to target a modest level of growth via a portfolio of mixed assets. Their portfolios will primarily be invested in fixed interest assets but also defensive equity and property so as to achieve relatively stable long-term returns. In the short term, they typically expect some volatility.



31





Cash 4.50%


ISIN code: GB00BVYTZX71

Fund objective


Asset allocation

Typical investor

Investors with a Risk Profile 4 tend to target a moderate level of capital appreciation by investing in a multi-asset portfolio. Their investments will be mainly in UK fixed interest securities, equities – in particular UK equities – and property. They typically expect a moderate amount of volatility.



32





Cash 3.50%


ISIN code: GB00BF232H25

Fund objective


Asset allocation

Typical investor

Investors with a Risk Profile 5 tend to target longer-term capital growth. Their investments will be mainly in fixed interest, equities with a UK focus and also some ‘alternative’ asset classes, mostly property. They typically expect some volatility in return for the possibility of higher long-term returns.



33





Cash 2.50%


ISIN code: GB00BVYV0275

Fund objective

The fund aims to achieve long-term (in excess of five years) total return (the combination of income and growth of capital) by investing in a mix of assets from around the world and aims to limit volatility over rolling five-year periods to 14.5%. The fund aims to achieve its objective through investing at least 70% in passive collective investment schemes (eg funds that track an index).

Asset allocation

Typical investor

Investors with a Risk Profile 6 tend to target a return using a portfolio with a higher equity content and a wider geographical spread. Their investments will be predominantly in UK and overseas equities, with an exposure to fixed interest and property in order to provide growth-orientated diversification. They typically accept some volatility in return for the possibility of higher long-term returns.



34





Cash 1.50%


ISIN code: GB00BVYV0721

Fund objective


Asset allocation

Typical investor

Investors with a Risk Profile 7 tend to target long-term capital growth by adopting a higher risk level. Their investments will typically be in UK and overseas equities but also some ‘alternative’ asset classes, for the purpose of achieving long-term capital appreciation.



35

Chart 4: Prudential Risk Managed Passive fund family performance

RMP1 (0-30)

RMP2 (10-40)

RMP3 (20-55)

RMP4 (40-80)

RMP5 (60-100)

100

105

110

115

120

125

130

135

140

145

Chart 4 shows performance since the range was formed, in September 2015, although two of the funds have existed since February 2007. As mentioned earlier, these funds were up until very recently known as Prudential Dynamic Focused Portfolios.

Source: Morningstar reinvested price series for P share class (Acc) rebased with Sep 2015, January 2019

36

Prudential Risk Managed PruFundsWithin the multi-asset universe

In terms of Defaqto’s multi-asset framework, Prudential’s Risk Managed PruFunds are seen as:

Multi-asset funds


Management approach• Multi-manager• Fund of funds• Fettered


alternative

Investment methodActive

Defaqto Diamond Rating

The Risk Managed PruFund family does not receive a Diamond Rating from Defaqto. This is because these funds are set up as life and pension funds. Also, their smoothing would make their risk-adjusted returns incomparable with all the other funds in the rating peer group.

For each individual portfolio, the following pages show its objective, its asset allocation, its Defaqto Risk Rating, the type of investor likely to invest in it (based on the Risk Rating) and its historical performance.

The ISINs shown are for the versions of the fund available through the ISA. Other versions with different ISINs are available for different tax wrappers.

37

Risk Managed PruFund 1




Cash 4.25%


ISIN code: GB00BQQFX561

Fund objective

The fund aims to achieve long-term total return (the combination of income and growth of capital). The fund is actively managed and aims to limit the fluctuations (‘volatility’) of the investment experience, after allowing for smoothing, to 9% per annum over the medium to long term.

Asset allocation

Typical investor

Investors with a Risk Profile 3 tend to target a modest level of growth via a portfolio of mixed assets. Their portfolios will primarily be invested in fixed interest assets but also defensive equity and property so as to achieve relatively stable long-term returns. In the short term, they typically expect some volatility.


Source of performance data: Financial Express (FE). Please remember that past performance is not a reliable indicator of future performance. The figures are intended only to demonstrate performance history of the fund and include a representative fund charge of 0.65% pa and any additional investment expenses. They take no account of product or advice charges. Some, if not all, of the funds comprising the ABI sector averages are net of fund charges. The application of charges may impact the overall performance. The value of your client’s investment can go down as well as up and the amount your client gets back may be less than they put in. Performance is shown on a bid to bid basis.

38





Cash 3.25%



Fund objective


Asset allocation

Typical investor

Investors with a Risk Profile 4 tend to target a moderate level of capital appreciation by investing in a multi-asset portfolio. Their investments will be mainly in UK fixed interest securities, equities – in particular UK equities – and property. They typically expect a moderate amount of volatility.



39




Cash 2.50%


Fund objective



Asset allocation

Typical investor

Investors with a Risk Profile 5 tend to target longer-term capital growth. Their investments will be mainly in fixed interest, equities with a UK focus and also some ‘alternative’ asset classes, mostly property. They typically expect some volatility in return for the possibility of higher long-term returns.




40





Cash 1.75%


Fund objective


The fund aims to achieve long-term total return (the combination of income and growth of capital). The fund is actively managed and aims to limit the fluctuations (‘volatility’) of the investment experience, after allowing for smoothing, to 14.5% per annum over the medium to long term.

Asset allocation

Typical investor

Investors with a Risk Profile 6 tend to target a return using a portfolio with a higher equity content and a wider geographical spread. Their investments will be predominantly in UK and overseas equities, with an exposure to fixed interest and property in order to provide growth-orientated diversification. They typically accept some volatility in return for the possibility of higher long-term returns.



41





Cash 1.00%


Fund objective


Proposed asset allocation


As this is a new fund, there is no historical performance data.


42

ChargesMIFID II compliant open-ended investment company (OEIC) fund charges (P share class) are shown in Table 3, both ex-ante (estimated) and ex-post (actual).

Source: Prudential and Defaqto Engage, 25 March 2019

Table 3: OEIC fund charges

Portfolio OCF % Transaction fee % Total % OCF % Transaction

fee % Total %

Estimated Actual

Risk Managed Active 1 0.55 0.07 0.62 0.55 0.05 0.60




Risk Managed Active 5 0.57 0.04 0.61 0.57 -0.01 0.56

Risk Managed Passive 1 0.26 0.07 0.33 0.26 0.07 0.33





The PruFund charges are tax wrapper dependent and should be checked on pruadviser.co.uk

https://www.pruadviser.co.uk/

43

Source: Prudential, March 2019

How can the PruFolio funds be accessed?

Fund nameLF Prudential OEIC

Prudential ISA

Prudential Retirement Account

Prudential Investment Plan

Prudential International Investment Bond

Prudential International Investment Portfolio

Prudential Flexible Investment Plan

Prudential Trustee Investment Plan

Defaqto Star Rating

Risk Managed Active 1-5 ✓ ✓ ✓ ✓ ✓ ✓ ✓

Risk Managed Passive 1 ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

Risk Managed Passive 2 ✓ ✓ ✓ ✓ ✓

Risk Managed Passive 3 ✓ ✓ ✓ ✓ ✓ ✓ ✓



Risk Managed PruFund 1-4 ✓ ✓ ✓ ✓ ✓

Risk Managed PruFund 5 ✓ ✓

PruFund Cautious ✓ ✓ ✓ ✓ ✓ ✓

PruFund Growth ✓ ✓ ✓ ✓ ✓ ✓

The Risk Managed Active and Passive funds are available on 23 platforms.

The funds also appear within Defaqto Engage, our end-to-end financial planning software solution, to help advisers select products and funds that are suitable for their clients’ needs and evidence their due diligence for compliance purposes. Advisers can filter the universe and select funds on the basis of a range of criteria, including charges and various different performance measures.

As mentioned earlier, if a client has completed an attitude to risk questionnaire, then their adviser can also view and select funds with a Defaqto Risk Rating corresponding to the client’s risk profile.

You can see more at defaqto.com/advisers/engage

Table 4: How the various PruFolio funds can be accessed

https://defaqto.com/advisers/engage

44

ConclusionRisk bound funds offer investors access to disciplined, well-resourced and process-driven solutions to manage and meet client expectations and attitude to investment risk.

Risk bound solutions managed with discipline lend themselves to maintaining alignment with a client’s tolerance for loss, both now and in the future. In most cases it is possible for the client to invest in the same family of funds throughout their investment lifecycle and just move up or down the risk scale.

For the adviser, the benefit is that there is a reduced amount of due diligence to carry out in terms of finding a new proposition, as the majority of work will have been done at the start when researching the market and selecting the family. Also, there will be less explaining needed to the client when changing fund as the underlying approach will be the same.

However, there can be significant differences in structure, process and other features across the various risk bound fund families in the market, so due diligence is still very important – such funds need to be monitored to ensure that they are meeting their aims and objectives on an ongoing basis, as with any other fund.

Also, the choice of risk bound family will depend on the investment beliefs of the client and their adviser:

• Do they prefer the lower costs of passive management or the potential to achieve outperformance that active management offers?

• Do they value the greater opportunity set that unfettered management offers or the lower charges of fettered management?

• Are they prepared to include alternative asset classes in their portfolios, with their potential diversification benefits and greater returns but possibly also greater risks?

Defaqto’s Diamond Ratings can act as a framework for research into and selection of risk bound fund families. Our rating methodology shows where families sit within the risk bound universe on the basis of our criteria, as well as providing a good indication of those families that have broadly delivered on their objectives. In addition, Defaqto’s ‘quadrant’ analysis of the multi-asset fund universe across four different investment dimensions has been designed to help, guide and educate advisers in this potentially complex area.

Prudential’s PruFolio ranges are three examples of risk bound fund families. Based on our review of these offerings, we believe their strengths include:

• A large and experienced investment/research team, together with a financially strong parent company behind them

• A proprietary investment process that has been in place for a long time

• Above average funds in each family, covering the 3–7 Risk Ratings (on a scale of 1 to 10) in which the majority of investors will tend to sit in terms of their attitude to risk

• A choice of investing in active collectives, passive collectives or smoothed funds

• Very competitive charges in the cases of the Risk Managed Active and Risk Managed Passive families (in the case of the Risk Managed PruFunds, because they aren’t Diamond Rated and their charges vary by tax wrapper we can’t compare their charges to peers so easily)

45

Every day, for each PruFund, Prudential monitors two things: (1) the unit price, which they refer to as the ‘smoothed price’, which normally increases each day by the expected growth rate (EGR), and (2) the ‘unsmoothed price’, which is the value of the underlying fund divided by the total number of units.

Every day the smoothing process checks the gap between the smoothed price and unsmoothed price. For this purpose, the gap is calculated using both (1) the unsmoothed price and (2) a five-working-day rolling average of the unsmoothed price. If the gap is ever equal to or more than the Daily Smoothing Limit (a specified limit, shown as a percentage of the smoothed price, which Prudential may choose to vary from time to time and which may differ across the range of PruFund funds), Prudential will adjust the smoothed price straight away, to reduce the gap to the value of the gap after adjustment for the relevant fund.

For example, on Risk Managed PruFund 3, if the unsmoothed price differs from the smoothed price by 10% or more, based on both the actual unsmoothed price and a five-day rolling average of the unsmoothed price, then the smoothed price will be adjusted immediately to reduce this difference to 2.5%. The smoothed price will then continue to increase at the EGR after any adjustments have been made. Some of the other funds have an 8% check.

In addition to monitoring the unit prices daily, Prudential applies further monitoring of the unit prices at each quarter date. On each quarter date, if there is a gap that is equal to or greater than the quarterly smoothing limit (QSL), when Prudential compares the unsmoothed and smoothed prices for that day, they will reduce the gap by half by adjusting the smoothed price. Where necessary they will repeat this process until the gap is less than the QSL. Some versions of the PruFunds have monthly rather than quarterly smoothing.

The quarterly and monthly limits are 50% of the daily check limits; so for funds which have a 10% daily check, the QSL is 5%, whereas for those funds which have an 8% daily check, the figure is 4%.

Appendix A – Smoothing processThe smoothing process referred to at the start of Part 2 is discussed in more detail here.

46

Send us your feedback Your feedback is extremely important to us and we would be grateful if, after completing this publication, you would take a few minutes to complete a short survey. Your answers will be treated in the strictest confidence and the results of this will help the development of future publications.

The survey can be accessed at:

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Our experts research, collect and continuously assess over 43,000 financial products. Our process is extremely robust and is driven by over 60 specialist analysts who have unparalleled knowledge of financial products, services and funds in the market. Our independent fund and product information helps banks, insurers and fund managers with designing and promoting their propositions.

Defaqto RatingsDefaqto Star Ratings are the most trusted expert assessment of products in the market. Products can receive a Rating of 1 to 5, depending on the quality and comprehensiveness of the features it offers. A 1 Star Rating indicates a basic product, while a 5 Star Rating indicates one of the highest quality products in the market. Star Ratings provide consumers, advisers and brokers with an accurate benchmark so that they can see at a glance how products and policies in the market compare.

A Diamond Rating reflects the performance of a managed fund or fund family. Funds or fund families can receive a Rating of 1 to 5 based on a detailed and well-structured scoring process, allowing advisers and other intermediaries – and their clients – to see instantly where they sit in the market in terms of fund performance and competitiveness in areas such as fees, scale, access and manager longevity. A 5 Diamond Rating indicates it is one of the best quality funds available in the market.

Service Ratings provide advisers with a simple and unbiased assessment of provider service. Based on advisers’ perceptions of the service they receive, providers are rated Gold, Silver, Bronze.

Risk Ratings use the projected volatility of a fund using asset allocation and historic volatility, based on observed standard deviations, to map a fund to a Defaqto Risk Profile. Risk Profile 10 indicates highest risk and Risk Profile 1 represents lowest risk.

Income Risk Ratings are unique to the market, comparing fund objectives, asset allocations, income and capital volatilities, and maximum drawdown. The Ratings are mapped to four Income Risk Profiles based on the income required and the level of risk. They are: capital preservation, low income volatility, medium income volatility, high income volatility.

About Defaqto Defaqto is an independent financial information business, helping financial institutions and consumers make better informed decisions.

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Defaqto Engage and Engage CoreDefaqto Engage is our end-to-end financial planning software solution enabling advisers to manage their financial planning process all in one place.

Engage Core, the latest version of Defaqto Engage, combines risk profiling, three-way fund, platform and product research and suitability letters templates into one easy-to-use tool. Visit defaqto.com/advisers/engage to learn more.

The Service Ratings and satisfaction results by category are available within Engage. Advisers can use the Service Rating and the individual category satisfaction scores (for example, new business servicing, existing business administration, online servicing) during the research process as one of a number of selection criteria. They can also be added to comparison tables.

Advisers should note that not all providers are rated; to qualify for a Service Rating, providers must receive a minimum number of responses from advisers. So, using any service results in the filtering process may exclude providers offering potentially suitable client solutions from the research output.

We really couldn’t create the Service Ratings without advisers – they are different from our Star and Diamond Ratings, which are created by our experts and based on facts, not opinions.



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Please contact your Defaqto Account Manager or call us on 0808 1000 804

defaqto.com/advisers

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