Managers issue risk warning

Fund managers are warning that the risk indicators they use in information for investors may make their funds seem less volatile than they really are.

Monday, August 21st 2017, 6:00AM

by Susan Edmunds

Risk indicators were introduced as part of the Financial Markets Conduct Act.

Managers must give information on their funds’ risks in their PDS, as an entry in the Disclose register when the PDS is lodged, and in every fund update.

But the risk indicators are determined by historic volatility, based on the most recent five years of fund returns.

Concerns were raised before the risk indicators were introduced, and now almost nine months in to the new regime, managers are still unconvinced.

Paul Glass, of Devon, said they were not working well from an investor’s point of view.

He said while the intention was good, they were calculated in too formulaic a way.

He said it would be preferable for managers to be able to calculate their own assessment if they felt the risk indicator was not giving an accurate impression.

"[Managers] should be able to put in a higher risk indicator.”

He said because the past five years had been very strong for equity markets most funds would appear to have low volatility. He said it would be good to have a minimum risk indicator set by a defined framework, that could then be adjusted by managers.

Richard James, of NZ Funds, shared his concern. “I would say they materially understate the risks facing investors today. The most pronounced example of that is in NZ equities where volatility over the past five years has been about two-thirds of what we would normally expect yet we are prohibited from using a higher risk rating even though we believe current risks are elevated.”

But a Financial Markets Authority spokesman said they were operating as expected.

“The risk indicator is a representation of the volatility of returns in a fund. Specifically, the rating is based on the funds returns within the most recent five years and is required to be updated quarterly on the fund updates," he said.

“As such, the rating is a moving number and it is to be expected that there may be periods where the risk rating moves up and down. As all funds were required to transition by December 1, 2016 and over the last few years global financial markets have had periods of smooth growth, this is reflected in the current ratings. As such, if markets become more volatile, the risk indicators will reflect this as they are updated every quarter.

"It’s worth noting the risk indicator is not intended to be the only source of risk disclosures. Where there are circumstances which may affect the risk of returns to investors, other than those already reflected in the risk indicator, managers have the option to disclose these as 'other specific' risks.”

Tags: Devon FM equities Financial Markets Conduct Act FMA funds management investment NZ Funds Paul Glass Richard James risk