Are my pension funds too risky?

_pete_

Hello

I opened a Norwich Union pension in 2007 on the advice of an IFA. At the time he gave me a questionnaire to assess the level of risk that I was comfortable with - the questionnaire score suggested that I am a 5/10 (medium risk). I agreed with my IFA that because I was 20 years from retirement and would like a higher return on my investment we should proceed as if my risk level were 7/10.

The IFA opened the pension with all the money divided equally between the following 4 funds:

- NU European Equity
- NU Sustainable Future UK Growth
- NU Pacific Equity
- NU Gartmore Emerging Market


When I met with my IFA recently to discuss how these funds were performing I raised the issue of risk again and he assured me that the European Equity and Sustainable Future UK growth funds are low risk, whilst the Pacific Equity and Gartmore Emerging Markets are high risk, and that the overall portfolio is therefore about 7/10 in terms of risk.

Having done some research on the internet, I am concerned that my IFA's assessment of these funds' risk levels is inaccurate, and that my portfolio is too high risk.

Is there any definitive way of deciding how risky these funds are, or are the actual risk levels a matter of debate?

If my IFA has placed my investment in funds that are too high risk (ie, if the portfolio overall is more than a 7/10 risk level) how should I proceed?

Thanks

Pete

dunstonh

first thing to check is if this relates to a single premium investment or if it is a regular contribution. If regular, then the risk is reduced a bit because of pound cost averaging (where you buy units every month and it averages out the ups and downs). Especially when the regular is long term.

On a scale of 1-10 (1 being cash) the UK and European funds are 7. Pacific 8 and emerging markets 9.

Is there any definitive way of deciding how risky these funds are, or are the actual risk levels a matter of debate?

It is a matter of opinion but the differences in opinion are not likely to be that great on these funds. NU issue a funds guide which gives their views on the risk rating of the funds. You can download that from their website. You have to be wary when comparing risk profiles though as you need to know the base point. Some start at cash (like I did) but others start on the basis of their lowest risk fund they offer whilst others may start at unit linked funds etc.

jamesd

Here's a document giving NU risk ratings for a range of its funds:

Medium to High - NU European Equity
Medium to High - NU Sustainable Future UK Growth
High - NU Pacific Equity
not in list,high+ - NU Gartmore Emerging Market

The fund mixture appears to take the risk above 7 to perhaps 8. Not too bad given your willingness to be flexible.

Your fund mixture appears to be poorly selected, biased to what looked like areas that could quickly make the adviser look good in your eyes at the time the funds were selected, but neglecting the general global growth area, with for example nothing in the US.

A better match for your 7 target risk level and a reasonable diversification could be:

55% global growth (includes Europe, US, Japan)
30% UK (equity income perhaps)
10% emerging markets
5% BRIC

This is still quite heavily biased to higher volatility areas but it doesn't ignore a huge chunk of the world economy (US and Japan).

For better long term growth prospects you could take 10% from global growth and 5% from UK, double the percentage in emerging markets and add 5% Pacific but that will have more volatility and exceed the 7 target. Still not as much volatility as you will have seen so far, so if you haven't been grossly unhappy you may wish to do it to seek better long term growth.

Note that this is still not a really good mixture and a truly capable advisor would probably use more funds than I can sensibly use as an example in this discussion.

purch

Are my pension funds too risky?

They are probably slightly less risky now, than they were 6 - 9 months ago

dunstonh

The spread does seem a bit weak. If you are going to use a good contract like the NU PPP which has a strong fund range, then limiting yourself to picking just 4 sectors and putting 25% into each is a bit basic.

That said, if you are starting at zero and paying monthly, then its not until you get to around the 20k mark that the differences will start to tell. Although with PPPs, there is no reason to not start as you mean to go on.

_pete_

Thanks for the replies. I initially invested a lump sum, then moved to monthly payments. Sounds like the risk level is an '8' rather than a '7'. My IFA seems to want to be quite active in managing the portfolio - moving in and out of markets when he thinks they are going to rise/fall, rather than choosing a diverse portfolio and leaving it alone. He deliberately chose not to invest in the USA.

However, am concerned that he described both the Sustainable UK and the European funds as 'cautious', when it appears that they are medium/high risk. Does this mean he calibrates risk differently? Or that he is unaware of their NU risk rating? Does this constitute miss-selling?

I'm also unsure whether the kind of active management he describes is better than simply investing in a more diverse portfolio and leaving it alone. Any comments?

dunstonh

However, am concerned that he described both the Sustainable UK and the European funds as 'cautious', when it appears that they are medium/high risk. Does this mean he calibrates risk differently?

Almost certainly does mean he calibrates risk differently. I would guess the base point is not cash.

Or that he is unaware of their NU risk rating?

Doesnt matter what NU show on their risk profile. IFAs should really use independent means.

Does this constitute miss-selling?

Yes and No. The product is not mis-sold and if he gets it right you are not going to complain about it. However, he does leave himself open to a potential complaint when you suffer a bigger loss than you are prepared to accept.

Remember risk has to be put in context. One persons high is another persons low.

I'm also unsure whether the kind of active management he describes is better than simply investing in a more diverse portfolio and leaving it alone. Any comments?

Depends on the activity. Portfolio rebalancing is common sense. However, stock picking and hoping for the best is random and more often than not fails. Often you do tweak portfolios outside of the preferred strategy. Maybe banking profits into something safer and moving them back when the markets are lower but that is tweaking around the edges. Not wholesale discretionary fund management. That isnt what being an IFA is about.

jamesd

_pete_ wrote: »

My IFA seems to want to be quite active in managing the portfolio - moving in and out of markets when he thinks they are going to rise/fall, rather than choosing a diverse portfolio and leaving it alone.

What were the times when this was reviewed? What did he say about the economic cycle and how he expected the Pacific and emerging markets to do during an economic downturn?

I'm asking because, among other reasons, I backed off from putting lots of regular contributions in emerging markets in April/May because the chance of a recession in which those areas would suffer disproportionately seemed too high. Even though my own risk tolerance is above high, I've got around 20-30% or my pension money in (real) low risk investments and around 50% in major economies. And my ISA money is around 40% in cash. Yet with a substantially lower risk tolerance you're taking more risk than I am when actively managing where my own money goes. So I want to know when he's supposed to have reviewed this and why he made the decisions he did at that point.

So ask him to explain when he made decisions and what his reasoning was for them at those times.

_pete_ wrote: »

However, am concerned that he described both the Sustainable UK and the European funds as 'cautious', when it appears that they are medium/high risk.

Ask him what he calls cash gilts, AAA corporate bonds and high yield bonds on the rating scale he's using. All are below all of the funds you have there in risk and he seems to have nowhere to put them on his risk scale.

_pete_ wrote: »

Does this mean he calibrates risk differently? Or that he is unaware of their NU risk rating? Does this constitute miss-selling? ... I'm also unsure whether the kind of active management he describes is better than simply investing in a more diverse portfolio and leaving it alone. Any comments?

It means that I don't trust him (to describe risk sensibly in a way that leaves room for real low risk investments) and his management (to consider the economic climate and adjust the mix). He doesn't seem to have room on his risk scale for funds that are truly low risk, he chose funds that were fashionable expectations to do well when you talked initially but seems not to have used his discretion to reduce exposure to high risk areas when it became clear that they were likely not to do well.

But do note that this is still about fact finding - what he did, when and why. Where you're invested, with a bit of broadening and ongoing buying, is not now a really bad place to be if you're not losing sleep over the drops. You've probably taken the really big hits that you'll have to take with that mixture, unless we go from a two to four times a life to once a lifetime situation that could halve the value again.

There's absolutely nothing wrong with active management. I'm just concerned that you seem to have been left to sleepwalk into a recession that would seriously hurt where half of your money went and I want to know when he looked and why he left you there.

Five years from now, even with all written in this discussion, you're probably going to be fine even sticking with exactly the investments that you have, so don't let this upset you greatly about the values today.

_pete_

Thanks again for the helpful comments.

dunstonh wrote: »

Doesnt matter what NU show on their risk profile. IFAs should really use independent means.

Are these independent risk assessments available on the internet to members of the public such as myself? Where might I find them?

dunstonh wrote: »

Portfolio rebalancing is common sense. However, stock picking and hoping for the best is random and more often than not fails. Often you do tweak portfolios outside of the preferred strategy. Maybe banking profits into something safer and moving them back when the markets are lower but that is tweaking around the edges. Not wholesale discretionary fund management. That isnt what being an IFA is about.

This IFA's approach seems to be to watch the markets, do a lot of 'research' via the internet (his research seems to consist of reading articles and getting a sense of where people think different markets are going) then move in and out of particular markets/funds - ie, he thought America was a bad place to be last year. This seemed to make sense to me when I set up the pension but now I'm wondering if it is a sensible approach?

jamesd wrote: »

What were the times when this was reviewed? What did he say about the economic cycle and how he expected the Pacific and emerging markets to do during an economic downturn?

When we set up the pension he said that he would move to different funds when he thought these markets were moving downwards. I was unhappy that he appeared to be caught out by the 'crash' this Autumn. His explanation was that (a) there was nowhere to move the funds to as everything 'crashed' (b) he was on holiday in Malaysia at the time.

jamesd wrote: »

It means that I don't trust him (to describe risk sensibly in a way that leaves room for real low risk investments) and his management (to consider the economic climate and adjust the mix). He doesn't seem to have room on his risk scale for funds that are truly low risk, he chose funds that were fashionable expectations to do well when you talked initially but seems not to have used his discretion to reduce exposure to high risk areas when it became clear that they were likely not to do well.

This is one of my concerns - I think that his medium risk is my high risk.

jamesd wrote: »

There's absolutely nothing wrong with active management. I'm just concerned that you seem to have been left to sleepwalk into a recession that would seriously hurt where half of your money went and I want to know when he looked and why he left you there..

What I'm realising is that you need to be a very informed consumer to be able to hire an IFA with confidence. This chap seemed very thorough when we first met to discuss my needs. We talked about my goals, attitude to risk etc etc then he took me through the funds that he was recommending, showing me the figures on their past performance etc. It would never have occurred to me to ask the kind of questions that you are flagging up now.

Are there any books that you would recommend someone like me to read so they can challenge/question their IFA from a more informed standpoint?

dunstonh

Are these independent risk assessments available on the internet to members of the public such as myself? Where might I find them?

Morningstar and trustnet give indications of risk.

I was unhappy that he appeared to be caught out by the 'crash' this Autumn.

I think you need to adjust your expectation. No-one knows when a correction is going to occur and they happen so quickly normally. You also dont know when the bottom is and when the recovery will start. Anyone that tells you that they do is talking bs.

What I'm realising is that you need to be a very informed consumer to be able to hire an IFA with confidence.

Not really. IFAs do the most business but account for the smallest number of complaints.

You have to be aware though that currently the term IFA covers a wide range of skills and speciality areas. There are different business models and different opinions on investment strategies. This IFA presented his way of doing things and you entered into business knowing that. Just because others have different strategies or opinions, it doenst make any of them wrong. Investing is about opinion and not cold hard fact.

The issue here is that you are invested in what appears to be just above your risk profile as we see it. However, the IFA risk profiled you and placed you within his risk scale. It doesnt mean it will match my risk scale or anyone elses risk scale.

There is nothing fundamentally wrong with the recommendation apart from our opinions that two of the funds are slightly above what we percieve to be a 7 out of 10 risk scale (where cash = 1).

jamesd

The claim that there was nowhere to move the funds because everything crashed is balderdash and ignorance or deception. First, cash, government and corporate bonds exist, as did the Blackrock UK Absolute Alpha fund. Those did not move as much as the funds you hold. Even with the funds you hold, different regions fell by different amounts and it's easy to adjust the proportions in each to reduce risk.

I personally might like what he's doing with some of my money - his and my views were reasonably close about what might work well. The problem is that I could instead buy the Neptune Global Equity fund and get someone who's probably better at the job to do this work. And that I don't think he's being cautious enough for me and definitely not for you when it comes to the macroeconomic picture - he's trying to take all available profit without factoring in the very rapid downturn risk that dunstonh mentioned. You can't know when that will happen but you can know that the risk of it is high and position yourself accordingly.

What he's doing could be very profitable for you in a rising market but I have the impression that he doesn't know when to become less aggressive to meet the needs of those who want reduced risk, even if that means losing some growth potential. Nothing wrong with getting timing wrong sometimes, even a lot of the time, it's expected. But falsely claiming that there was nowhere to go is not.

Doesn't matter what the quality of the performance might be, he's either not willing to tell you the truth or doesn't know what it is.

And that's a real shame, because it's completely unnecessary if he just had the honesty to admit that he had options and didn't use them.

Do be careful to note why I have very strong reservations: it's not the quality of the investment choices, where there's ample room for disagreement about what's best. It's what he's saying about them. It's completely impossible to be treating a customer fairly by lying to them and I have no alternative but to conclude that he is lying to you, because it's not credible that he's as ignorant as he'd have to be to not be lying.