Fund risk profiling and Dynamic Planner explained
Assessing Suitability of Fund Risk Profiling
The DT investment team generates estimates as to how a wide range of asset classes are expected to behave over the long-term (fund risk profiling) with respect to: returns, volatility and co-variance. These estimates are collectively known as the Capital Market Assumptions, and are produced following thorough analysis of historic data, current market yields and estimates of risk premiums, as well as other factors such as, current corporate debt default rates and inflation.
From this, the team can produce a spectrum of asset allocations that gradually increase in risk from level 1 to 10 risk levels. Their methods for doing this are based on Modern Portfolio Theory techniques to derive efficient portfolios, which maximise expected returns for any given degree of risk and when plotted collectively, form an efficient frontier.
To risk profile funds and portfolios, DT looks at a combination of the following attributes and uses its Capital Market assumptions where necessary, to understand the level of risk expected within the portfolio:
• Historical data of each fund’s past asset allocation positions, which we map to our standard asset classes
• The volatility derived from the fund’s strategic benchmark, where appropriate
• The volatility of the actual performance achieved by each fund
DT then benchmarks the results against their spectrum of 10 Dynamic Planner risk profiles.
Selecting a suitable investment solution doesn’t end with risk profiling – it also requires an assessment of quality. And to help you with research on fund selection, DT have recently launched the ACE risk-adjusted performance ratings.
We have identified from a universe of around 2,000 funds, just over 250 which have been ACE rated, representing approximately a 12% success rate.