S&P Capital IQ is re-classifying its asset allocation peer groups in an attempt to provide greater clarity and consistency of definitions.
S&P Capital IQ has reportedly used a two-stage re-classification procedure based on a portfolio’s exposure to risk assets.
Randal Goldsmith, the director at S&P Capital IQ, says: “Other peer group authorities define sub-sectors primarily by their exposure to equities. However, there are other assets that are comparably risky, for example sub-investment-grade fixed income, property – for liquidity reasons – and commodities, and this is not being adequately taken into account.”
Stage one will classify funds based on the single highest weighted risk asset in the portfolio while stage two will factor in a fund’s “volatility, downside deviation and maximum drawdown statistics” based on aggregate exposure to risk assets.
“For example, a big difference exists between two funds whose portfolios are each 70% invested in equities if one has the remainder in cash and high quality bonds, while the rest of the portfolio of the other fund is in sub-investment-grade fixed income and commodities. Stage two of our classification process will allow us to account for this difference”, adds Goldsmith.
A defensive fund will have between 0% and 35% exposure in stage 1 while an aggressive fund will carry greater than 85% exposure.
This is adjusted slightly for stage 2 as a defensive fund has an upper band of 45% while an aggressive one must have greater than 95%.