Balanced funds do not necessarily deliver balanced risk

The risk rating of balanced managed funds varies widely, according to new research from Skandia, with only 5% of funds having an expected risk rating of five out of ten when measured on the firm's own risk scale.

Skandia says the findings point to an urgent need to review existing investments in the £500bn industry, and adjust or consolidate them where appropriate into portfolios that are directly aligned with the individual investor's risk profile.

The research analysed 489 balanced managed life funds using three-year volatility and performance figures. The results showed a wide range not just in performance but also in risk.

Although investors might expect a balanced fund to have a risk rating of 5 using Skandia's risk scale of 1-10, (with1 being cash and 10 being global equity as represented by the MSCI world index) only 28 funds (6%) within the balanced managed life fund sector had this risk rating. The average rating was 7, with scores varying from 2 to 10. Similar outcomes were also observed within pension and UT/OEIC balanced funds.

Graham Bentley, head of investment marketing at Skandia, said the definition of managed fund sectors is extremely broad, so many funds categorised as having a similar investment profile actually deliver a very wide range of different outcomes. "While the sector defined approach may have been appropriate a decade ago, the combination of modern portfolio theory and technology can now help match investments more accurately to the investor's risk profile."

"Balanced managed funds are entirely appropriate for some investors as long as the risk profile of the fund is aligned with that of the investor. Now we can quickly and easily determine the risk level of each fund there is a significant opportunity for people to take control of their finances, review their existing investments and ensure they are aligned with their individual needs.

"Our analysis clearly demonstrates the need for sound investment advice so that investors can be confident their portfolios are on track to meet their needs."