Trustnet FE Risk score for portfolios

Audaxer

I have input my income portfolio containing 56% equities into a Trustnet portfolio backdated 5 years, and was pleased to see that it had a portfolio Risk Score of 55 compared to the VLS60 Risk Score of 62, as well as showing higher Total Returns than VLS60 over the last 5 years.

I know Trustnet Risk Scores are only based on the last 3 years, but is the lower portfolio Risk Score in relation to the returns a reasonably good indication that it will lose less than the VLS60 during an equity crash?

bowlhead99

No, I don;t think you can infer that.

55 is 'similar to' 62 so it doesn't mean it has magical defensive properties. It just means that both of them were a good bit less volatile than FTSE100 when the value swings are weighted towards more recent time periods within that 3 year riskscore review window (as FE use a 3 yr window and a decay factor in their modelling).

Obviously, they are relative scores against a benchmark. If FTSE100 (score 100) was super-volatile but your portfolio and your comparator portfolio was not, because neither were weighted particularly highly to the factors which caused FTSE100 to move in this particular window (e.g. oil price, currency issues, banking profits, whatever), it doesn't mean they will each have the same 'risk performance' compared to FTSE100 next year, because the factors moving FTSE100 in future might differ from what moved it most recently.

And they won't necessarily have the same performance compared to each other next year. For example, say your portfolio was less volatile than FTSE100 because it had fewer oil companies and was 30% corporate bonds. While your comparator portfolio was less volatile than FTSE100 because it had the same high level of oil companies but 15% corporate bonds and 25% government bonds. Both will score substantially lower than FTSE100 but how they compare to each other next year depends on what happens, relatively, to oil price, government bonds, corporate bonds. And currency mix, credit ratings, interest rates etc etc.

The fact that your portfolio went up more than Fund X in the last few years is a general indication that if it maintained that percentage annual movement (but in the opposite direction) it could go down more than Fund X in the coming years. It really depends on how it is constructed vs how VLS is constructed. You likely have different approaches to bonds, domestic vs overseas equities, company size and so on.

At the end of the day, the FE risk score is a crude tool which is nicer to have than not to have it at all, but you have to recognise its limitations - there will be other threads about this if you search back in previous years.

dunstonh

It is worth remembering that Trustnet FE risk scors have quirks (as do all scoring systems).

GE risk scores are actually more like snapshots.

Jan 2015, VLS60 was 49. Last month it was 63. This month it is 62. 6 months ago it was 59.

Snapshot risks can be useful but a fund that is in a period when it is more defensive at a moment in time could give the wrong impression of what risk it being taken over the life of a cycle.

but is the lower portfolio Risk Score in relation to the returns a reasonably good indication that it will lose less than the VLS60 during an equity crash?

No. It means it means the current holdings are lower risk but it does not mean future holdings will be. These are also assumptions based on limited criteria. e.g. UK Sterling bonds will carry a risk but it is not sophisticated to know the risk level of the individual bonds held.

Prism

The FE Risk Score is just an indication of how volatile a fund is on a weekly basis. I would say they tell nothing about how well a fund will perform during a rise in equities or a crash. For example most of the UK small companies funds have a low FE Risk Score and over 60% of the global funds on Trustnet have a higher than 100 risk score (the FTSE 100 level).

I completely ignore them myself when choosing a fund.

Linton

Prism wrote: »

The FE Risk Score is just an indication of how volatile a fund is on a weekly basis. I would say they tell nothing about how well a fund will perform during a rise in equities or a crash. For example most of the UK small companies funds have a low FE Risk Score and over 60% of the global funds on Trustnet have a higher than 100 risk score (the FTSE 100 level).

I completely ignore them myself when choosing a fund.

I would certainly take some notice of the FE risk Score. It will give an indication of how susceptible the fund is to local problems - small companies may be lower risk because they are less correlated. However a difference between 55 and 62 is just noise.

Possibly the reported high values of global fund FE Risks could be due to the £ currency variations which will affect almost all their underlying investments - certainly a strong correlation.

Audaxer

bowlhead99 wrote: »

The fact that your portfolio went up more than Fund X in the last few years is a general indication that if it maintained that percentage annual movement (but in the opposite direction) it could go down more than Fund X in the coming years. It really depends on how it is constructed vs how VLS is constructed. You likely have different approaches to bonds, domestic vs overseas equities, company size and so on.

At the end of the day, the FE risk score is a crude tool which is nicer to have than not to have it at all, but you have to recognise its limitations - there will be other threads about this if you search back in previous years.

Thanks bowlhead, I had been taking some comfort from the fact that Total Returns were well ahead of the VLS60 and at around the same level the VLS80, and looking at the graphs it dropped less than the VLS funds when there was a bit of a dip in 2015. I was a bit surprised at the returns as my income portfolio is less globally diversified than the VLS funds, as a bit more weighted towards UK equity income, although it does include more small cap than VLS.

I did fear that the FE Risk Score had its limitations, so I won't get carried away as it may well do worse in an equity crash. I've got a further lump sum to invest and just trying to decide whether best to add to my income portfolio or invest in another globally diversified multi asset fund.

Prism

Linton wrote: »

I would certainly take some notice of the FE risk Score. It will give an indication of how susceptible the fund is to local problems - small companies may be lower risk because they are less correlated. However a difference between 55 and 62 is just noise.

Possibly the reported high values of global fund FE Risks could be due to the £ currency variations which will affect almost all their underlying investments - certainly a strong correlation.

Maybe I should, but to me they don't seem to align with what I'm trying to do. For example I have a small holding in a fund investing in gold miners. Its there to protect somewhat against inflation risk and also political events when tend to send the price up. However its pretty volatile so its FE score is 303. So a fund i specifically put in to reduce my risk is classed as high risk.

Maybe I'll be proven to be wrong but so far the risk score hasn't worked for me.

Linton

Prism wrote: »

Maybe I should, but to me they don't seem to align with what I'm trying to do. For example I have a small holding in a fund investing in gold miners. Its there to protect somewhat against inflation risk and also political events when tend to send the price up. However its pretty volatile so its FE score is 303. So a fund i specifically put in to reduce my risk is classed as high risk.

Maybe I'll be proven to be wrong but so far the risk score hasn't worked for me.

If you put your portfolio into Trustnet and get a Risk Score of that I think you may be surprised. Putting together a set of uncorrelated funds can give you an overall Risk Score much less than any of the components. This after all is the whole point of a diversified portfolio.