FE has extended its risk scores to model portfolios or adviser-constructed portfolios.
The new FE Portfolio Risk Scores will compare the volatility of the portfolio to the FTSE 100, being recalculated weekly for all funds with a minimum 18-month track record.
The scores will look at the past three years’ track record, but have a built-in ‘decay factor’, meaning that older values carry less weight in the rating.
The measure produces a number rating for the portfolio’s risk, with the risk of the FTSE 100 getting a rating of 100, and more volatile investments getting a higher score.
Gary Wheeler, director at FE, says: “Given the importance of due diligence and assessing suitability during the investment advice process, being able to use FE Risk Scores throughout for all instruments, and now for overall portfolios, is fundamental in helping the advisory community compare like-for-like and drives greater transparency.”
FE hopes the tool will be used in portfolio comparisons, to measure the benefits of switching portfolios.
The tool takes the individual risk weighings of each fund held in the portfolio and generates a portfolio rating based on the weightings of the holdings and the correlation between holdings.
Thomas McMahon, analyst at FE Research, says: “For example, biotechnology and energy stocks are driven by different factors, so when one is falling fast the other might be rising or remain flat, or fall by much less. This means the overall change in the portfolio value is smaller than if it was fully invested in energy or biotech.”