Re-think fund risk ratings say ABI, IMA

Moves by European regulators to provide a standard risk rating for investment funds needs further refining to make them truly effective for consumers, according to the Association of British Insurers (ABI) and the Investment Management Association (IMA).

CESR, the Committee of European Securities Regulators, put forward its proposals for a standardised risk and reward rating methodology in December 2009.  It is now being considered by the European Commission for use when firms produce Key Information Documents (KIDs) for UCITS funds, starting from the second half of 2011.

Joint ABI and IMA research shows 70% of asset classes rated using the proposed method in 2006 would have had their risk categories changed only three years later.  Doubling the period of data used when assessing the relative risk of a fund lead to a significantly more reliable risk indicator.  Changing from five to 10 years reduced the proportion of asset classes that would have had their risk indicator changed between 2006 and 2009 from 70% to 30%.

The research also found that under CESR's proposed scale of seven risk categories, a third of asset classes and half of all funds would fall into one category alone.  The ABI and IMA therefore recommend adjusting the boundaries to give a better spread across the categories, helping consumers choose between funds.

Rebecca Driver, director of research at the ABI, says improving the way investment risk is explained to consumers has the potential to deliver significant benefits. "The rules as proposed do not yet fully deliver that benefit. We hope the research work released today will help the Commission as it looks for the best solution."

Julie Patterson, director of Authorised Funds & Tax at the IMA, adds that reducing investment risk to a single indicator for an individual fund is neither easy, nor a solution in itself to the complex investment decisions that consumers face.

ABI members constitute over 90% of the insurance market in the UK and 20% across the EU. They control assets equivalent to a quarter of the UK's capital. IMA members run some £3trn in assets under management.