Defaqto has developed its own set of 10 Risk Ratings, where Risk Rating 1 represents the lowest risk and 10 the highest risk. The ratings are based on volatility ranges (%), and there are overlapping boundaries between each of the ratings. This allows some discretion as to where a fund best sits, and minimises funds moving up or down the ratings over time.
Risk Rating process
Defaqto has an extremely robust process to risk rate funds. We look at the fund’s past volatility and use Moody’s stochastic engine to model the fund’s future volatility using its asset allocation (both long term and current), together with assumptions for the future returns, volatilities and co-movements of the asset classes it holds. Then we will hold a discussion with the fund manager which ensures a common understanding of our process, but also gives us the chance to consider other factors, such as a manager or mandate change during the life of the fund, which the numbers alone might not capture. The fund is then given a Risk Rating.
Every one of the nearly 500 risk rated funds and Discretionary Fund Manager managed portfolios has its rating reviewed on a quarterly basis, by our investment committee, to ensure it still sits within the boundaries for its current Risk Rating.
Using Defaqto Risk Ratings
Defaqto Risk Ratings are available to view in Defaqto Engage, an investment planning software solution that allows advisers to risk profile, research and recommend portfolios for their clients.
Engage supports a three-step process to determine a client’s agreed risk profile. First by assessing clients’ attitude to risk by obtaining their ‘natural’ risk profile, through the completion of a psychometric questionnaire. Then having a discussion with the client around their capacity for loss and required returns to reach an ‘agreed’ risk profile.
Janus Henderson’s funds have been risk rated, using the methodology referred to above to allow advisers using Engage to match suitable clients to their funds.