KIIDs

aroominyork

Key Investor Information Documents seem to rate most equity funds as 5/7 and most bond funds as 3/7. For example, I hold three bond funds all of which rate 3/7 yet they have different levels of risk. Schroder High Yield Opportunities Fund is highest risk, Sanlam Strategic Bond is a moderately aggressive strategic bond fund, and M&G Optimal Income is a cautious strategic bond fund. Am I missing something or are these 'key' information documents' risk/return profiles really not helpful at all?

P.S. VLS40 and VLS80 both rate 4/7. I think I've answered my own question: the KIID ratings contribute very little when researching funds.

bowlhead99

They are not amazingly helpful. The problem is that after doing the calculation for the relevant share class, the final figure (1-7) is based on prescriptive absolute thresholds that don't vary with the market, for example 4 means annualised volatility of between 5 and 10% over the last five years of weekly or monthly movements (depending how often NAV is produced); risk category 3 means 2-5% over same timescale. They are a snapshot at a point in time. If a fund's been running less than five years it gets more complicated depending on the type of fund or product the KIID is written about.

You would generally struggle to find any funds that you'd be interested in, in the 1 or 2 buckets. Most/ many pure equities funds will be in 6 or 7. A blended strategic bond fund measured over a period that has been relatively stable and generally good for bonds would probably fall into that '3' bucket as you mentioned. However if the five year period had encompassed a credit crunch-type event, those same bond funds might all jump up into category 4 instead, just as some of the equities ones go from 6 to 7 and perhaps some multi asset funds move from 4 or 5 up a notch, but perhaps they won't, depending how the volatility is maintained over the period.

If one of your 3 funds was really very good at delivering stable movements in the face of a crazy market, better than the others, maybe it would stay at 3 while the other two funds jumped up a level. But you won't see that in the risk rating now, you'd see it when it had happened.

For now while the returns are broadly positive and nice and comfortable and boring (mid 2012 to 2017 period), they all look like 3s. But if they have different strategies, perhaps the one investing in high yield bonds will suffer a bigger shock than the others if interest rates rise and corporate profitability and creditworthiness falter, so it might spike into a different category for a couple of years, especially if the bonds aren't all sterling or hedged while currencies go a bit mad.

As you surmise, such a risk scale is not telling you about total potential riskiness, it has to work off recent actual data, which might be milder in some years or decades than others. While the thresholds are mandated through ESMA regulations, there is nothing to stop fund distributors like investment platforms or data banks assigning their own private score.

Forr example Trustnet uses the FE risk score, a relative measure which has its own flaws but rarely produces an identical figure for two funds because its range is 0 to maybe 200 ; Old Mutual Wealth has a 1 to 10 scale where the KIID 1 or 2 or lower part of 3 would all go into its level 1 ; the upper part of KIID 3 and the bottom edge of KIID4 would be an OMW 2; but then the rest of KIID4 would be either OMW 3 or 4 or maybe even 5, and the KIID5 category containing many multi asset funds would be anything from 5,6,7,8.

The more granularity the better, perhaps, but beware of something claiming too much accuracy as there are lots of different ways to skin a cat and all methods have their detractors.

aroominyork

Thanks bowlhead - as ever, very helpful.

Malthusian

This is how the risk scale on KIIDs works compared to a "1-10" scale used by Distribution Technology:



In other words, virtually everything with any kind of equity content is a 5 or a 6.

5-6 on the KIID scale spans part of 4 all the way to half way up 10 on the Distribution Technology scale. A fund rated 5 on the KIID scale may be anything from "lowest medium" (4) to "high medium" (6). A 6 may be anything from "high medium" to "highest risk".

As Bowlhead said, not that helpful.

bowlhead99

Malthusian wrote: »

This is how the risk scale on KIIDs works compared to a "1-10" scale used by Distribution Technology:

And here's the comparison of the KIID scale with the OMW one I mentioned. In their accompanying article they noted that loads of the funds they offer are a 5 on the KIID scale and so their bands do a better job of splitting them out.



But what you can see is that the 1-10 scale there is not currently mapped the same way as the Distribution Technology mapping, even though they are both 1-10 scales.

So while you can say KIID is not massively helpful, it does have a definition in regulations, and all funds will have a score on that scale wherever you are when you see it. While if you see that L&G Multi Index 5 Acc is in the '5' band with Distribution Technology, it may not necessarily be in the '5' bend of someone else's 1-10 scale, and therefore when you are comparing two funds make sure you are doing it on the same scale whether that scale is the KIID 1-7 one or something else.

dunstonh

Risk scales need to be viewed knowing the context. Some will benchmark 1 as cash. Others will put 1 as gilts. The weightings between the risk segments is often not equal. Some will have more at the lower risk end and increase the volatility bands as they move up the scale.

KIIDs are bascially the worst of all the risk scales for the reasons already given on the thread.

badger09

dunstonh wrote: »

Risk scales need to be viewed knowing the context. Some will benchmark 1 as cash. Others will put 1 as gilts. The weightings between the risk segments is often not equal. Some will have more at the lower risk end and increase the volatility bands as they move up the scale.

KIIDs are bascially the worst of all the risk scales for the reasons already given on the thread.

Not sure if this is your 1st post after your recent 'sojourn', but welcome back:T

do163600

badger09 wrote: »

Not sure if this is your 1st post after your recent 'sojourn', but welcome back:T

+1 :j

Edited to make my post long enough to post!

pip895

I use the trustnet ratings (1~250) in assessing my portfolio - I like the way holding uncorrelated assets (even if with individually high scores) can be shown to reduce the overall volatility of your portfolio.

[Incidentally is there anything that links FE Risk Scores to the KIID ratings?]

Although the trustnet risk score does seem better it still has a number of limitations - if something happens - (like Brexit for many UK property funds)- the ratings can just jump dramatically.

Also I am not convinced that for instance the "TB Amati UK Smaller Companies" fund - one of the top performing funds in the UK Smaller companies sector at the moment, with a KIID of 4 and a FE Risk Score 0f 76 is really any safer/as safe as say "Vanguard FTSE UK All Share Index" with a KIID of 5 and a FE Risk Score 0f 93.

[Welcome back Dunstonh :T]

frankie

dunstonh wrote: »

.

Welcome back - good to have your valued input again

aroominyork

pip895 wrote: »

Also I am not convinced that for instance the "TB Amati UK Smaller Companies" fund - one of the top performing funds in the UK Smaller companies sector at the moment, with a KIID of 4 and a FE Risk Score 0f 76 is really any safer/as safe as say "Vanguard FTSE UK All Share Index" with a KIID of 5 and a FE Risk Score 0f 93.

This may be down to the difference between volatility and risk, as bowlhead explained in his first post. I hold Liontrust UK Smaller Companies (a rush of blood before properly considering the bid/offer spread and high management charge) which has a KIID of 4 and an FE of 61. Without looking across the whole smaller companies sector, it may be that they have generally risen very steadily over recent years.