Lowes Financial Management (LFM) has warned that Skandia’s stance on risk-rating funds could lead to “significant capital losses” by exposing clients to areas with unsustainable yield levels.
Melvyn Bell, investment manager at LFM, says ranking risk on a scale of 1-10 fails to take market cycles into account.
He says: “The net effect of the Skandia risk ratings, assuming level five is medium risk, will see lower-risk investors funnelled towards property, cash deposits and gilt funds to offset the high-risk equity exposure.”
Bell says Skandia’s Spectrum 3 fund has a 17.6% holding in the BlackRock UK Gilts fund.
He says: “In the last three years, this fund has benefited from falling yields as investors sought a safe haven from a feared economic collapse. However, many believe we are at a point where the yields are at unsustainable levels and could sustain significant capital losses if interest rates revert to more normal levels.” (article continues below)
The remarks come after Money Marketing, Fund Strategy’s sister publication, reported on Skandia research claiming that IFAs’ ratings of risk in balanced managed funds were lower than ratings assigned under its own analysis.
Graham Bentley, head of investment marketing at Skandia, says: “Melvyn’s point about funnelling lower-risk investors into gilts may not include the net effect of the risk rating. Skandia’s asset allocation tools do not optimise at fund level but at asset class level and based on prospective, not historic, longer-term volatilities.”