Old Mutual risk-targeted Spectrum range undershoots volatility and returns

The £2.25bn Old Mutual Spectrum range of risk-targeted funds has undershot volatility benchmarks and FE’s risk-targeted sectors since launch.

The Spectrum range sits in the IA Unclassified sector, however FE Analytics recently unveiled its own sectors to better compare funds targeting volatility and returns.

The UK Risk Targeted Multi-Asset Risk Band sectors groups funds by their FE risk score: Risk Band 2 consists risk score 30 to 50, Risk Band 3 is for risk scores between 50 and 70, while Risk Band 4 for 70 to 80.

They cover the six Spectrum funds, all of which have underperformed the sectors they are placed in.

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Against those peer groups the funds have all underperformed in varying degrees since their April 2008 launch; the riskier funds fared worst with Spectrum 7 underperforming its risk band sector by 13.9 per cent and Spectrum 8 by 17.5 per cent.

All of the funds are noticeably below their targeted volatilty bands.

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Old Mutual Global Investors multi-manager head John Ventre says the funds target volatility on a decade basis, so the low volatility of the past few years has depressed the funds below their ranges.

He expects volatility will return soon and will remain higher, which will drag the funds’ volatility back up to where they aim to be.

Volatility has to be assessed on a long-term basis because shorter periods distort the real amount of volatility that “black swan” events will bring and the potential losses they tow with them.

Black swans – or events that push inflation beyond two standard deviations from the mean – tend to be roughly 35 to 40 per cent falls.

When the funds were launched in mid-2008 volatility was very high and volatility ranges were breached to the upside, he says. After 2009 volatility became relatively benign, he adds.

“We’re willing to say we take a long-term view. If peers want to risk up their funds to nominally take advantage of this period of lower volatility then good luck to them.”

There have been scores of multi-asset risk-targeted funds launched in the past few years with managers who have not navigated a crisis, he adds.

“Certainly for the last year our performance has been lower than some others, but that’s been because we didn’t like government bond duration too much; it’s not a function of volatility or of not taking enough risk.”

Morningstar co-head of investment consulting and portfolio management Dan Kemp says using volatility as a risk measure is stalked by trouble due to its changeable nature.

“Volatility is not a stable measure, it’s cyclical. So at any time your portfolio will undershoot or overshoot the target.”

“The problem with volatility is that it doesn’t fully take into account the total risk.”

A severe market shock is likely to create potential losses well beyond what the volatility immediately preceding it would imply, he explains.

“That’s why when advisers are building portfolios and selecting funds they need to look beyond standard volatility measures.

“We would not be concerned if the volatility of a fund lay outside its current target band, given market conditions.”

Old Mutual Spectrum risk-targeted performance

Funds Performance since inception Three years
Old Mutual Spectrum 3 35.64% 16.61%
Old Mutual Spectrum 4 36.06% 18.27%
Old Mutual Spectrum 5 36.92% 19.92%
Sector: UK RTMA Risk band 2 (FE risk 30-50) 41.72% 21.92%
Old Mutual Spectrum 6 35.82% 22.14%
Old Mutual Spectrum 7 34.60% 23.90%
Sector: UK RTMA Risk band 3 (FE risk 50-70) 48.46% 26.54%
Old Mutual Spectrum 8 32.14% 25.11%
Sector: UK RTMA Risk band 4 (FE risk 70-85) 49.68% 29.87%

Source: FE Analytics; data from 28 April 2008 to 25 February 2014