Funds and risk

Prism · 8 April 2018 at 8:13PM

How does everyone assess the risk level of a particular fund they have or are considering buying into? Even describing what risk is can be complicated and mean different things to different people.

I tend to open the fund up in Morningstar (actually I use YouInvest to do this indirectly) and look at the portfolio. This breaks it into percentages of cyclical, sensitive and defensive sector weightings. From there I tend to assume those funds with a higher percentage of defensive stocks are better protected from a crash or downturn. I will also briefly look at the individual companies in the top 10 assuming I recognise them and if I do make some of my own assumptions.

I tend not to worry about volatility, sharpe ratio's, sortino ratio's or the FE risk score. I assume others do however - maybe I am missing something. I just find that they don't really seem to tell me anything useful for a long term investment.

When it comes to bonds my only basic assumption is that gilts are safer from downturns than corporate bonds and that UK bonds are safer than world bonds due to exchange rate variations. I don't yet hold any bonds but probably will in about 5 years.

Audaxer · 8 April 2018 at 11:32PM

Prism wrote: »

I tend not to worry about volatility

I would tend to assess the risk level of a fund mainly by the level of volatility. But just because a fund has a high risk/volatility level certainly doesn't discount it from being in a balanced portfolio. When choosing active funds I looked mainly for ones that had a long history of decent returns, and performed well in relation to it's peers during the 2008 crash.

aroominyork · 9 April 2018 at 11:46AM

And how do you assess volatility? FE scores only take into account, I think, the most recent three years and with more weighting to recent periods. In a thread re Japan, dustonh yesterday said "the risk of picking just 5 years is that its a short term snapshot". So how far back to you go? I also have a bit of a habit of looking at 2008 but can you really take one set of circumstances and assume they'll play out the same way in the next crash, or is 2008 just the best we have to go on? I wonder how much of the £20bn in M&G Optimal Income would be invested if the fund had been launched in 2009.

rathernot · 9 April 2018 at 12:51PM

I believe KID documents go off a formula based mostly around volatility.

aroominyork · 9 April 2018 at 12:55PM

rathernot wrote: »

I believe KID documents go off a formula based mostly around volatility.

They score 1-7, with the majority of bond funds scoring 3 and equities scoring 5. That doesn't help much.

Linton · 9 April 2018 at 1:40PM

I think it is not helpful to worry about the volatility of individual funds in your portfolio. The important thing is the behaviour of the whole portfolio. Provided you ensure that your funds are not strongly correlated you should find that the volatility of the portfolio is significantly less than that of the majority of its constituents.

For example although Linton Growth is more than 50% small and medium companies and includes funds close to 200 in the Trustnet score the overall Trustnet volatility is less than that of VLS100. The problem with a portfolio of relatively stable larger companies is that they tend to be rather highly correlated.

I think I would go further and say that if you want to control your portfolios volatility you should deliberately seek out higher volatility components to reduce correlation..

aroominyork · 9 April 2018 at 1:53PM

Linton wrote: »

I think I would go further and say that if you want to control your portfolios volatility you should deliberately seek out higher volatility components to reduce correlation..

Interesting counter-intuitive perspective. How do you most effectively assess correlation between funds you are holding? Is it by looking at geography, sectors, value/growth, market cap etc., or is there a (preferably free) tool?

Linton · 9 April 2018 at 2:08PM

aroominyork wrote: »

Interesting counter-intuitive perspective. How do you most effectively assess correlation between funds you are holding? Is it by looking at geography, sectors, value/growth, market cap etc., or is there a (preferably free) tool?

Morningstar portfolios come with a monthly report similar but different to the standard Xray. It includes a correlation table of the top 10 individual funds. However I believe that is part of the paid-for service.

Also I monitor all of the factors you list (geography, sectors, value/growth, market cap) for the portfolio as a whole and rebalance to try to keep them roughly in line with their values when the portfolio was set up.

gif1 · 9 April 2018 at 2:32PM

Very interesting thread. Going forward how would you assess value against growth? Just by looking at the P/E ratio? Low ratio is value, higher is growth?
Thank you

economic · 9 April 2018 at 2:39PM

I like to look at threads like this and laugh at the comments people make for one very simple reason:

In any market in any region of the world, there is always a time to buy and always a time to sell any investment. Looking at fundamental analysis, technical analysis, volatility (historical and implied vol), sharpe ratios, fund manager performance (historical again), fund manager investment strategy: They all sound nice and and one may get a warm fuzzy feeling using these metrics when deciding on investments. But in reality they never always work on a long term basis. And pretty much everyone on these boards are investing for the long term.

My only advice is to not put all your eggs in one basket, seek out risk to try to get lucky and realize that you will need luck on your side to come out the other side as a winner.

Funds and risk

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