- Both Funds have specific maximum and minimum volatility targets
- Both Funds have a competitive annual management charge of 1.00%
- Funds can be used within an ISA wrapper, and have minimum investments of £1,000
- Research 1 reveals that IFAs won’t recommend 33% of Balanced Managed and 28% of Cautious Managed funds because they are ‘too risky’
- 1.2 million people plan to invest more into the stock market to protect their money against inflation and rising tax 2
The Royal Bank of Scotland (RBS) has announced that it is to target the retail fund management sector with the launch of two new funds that aim to tame volatility. The Bank’s Volatility Controlled Cautious Managed Fund and Volatility Controlled Balanced Managed Fund aim to manage volatility and keep this markedly below sector averages, whilst delivering growth over the medium to long term. The bank will be using a unique combination of strategies around diversification, trend analysis and volatility control to deliver its new propositions.
Both funds, which are suitable for Stocks & Shares ISAs and accept balances of £1,000 or more, have highly competitive charges. The annual management charge for both is 1.00% compared to an average in the UK of 1.38% for Balanced Managed funds and 1.41% for Cautious Managed funds3. Both funds invest in a wide range of assets including equities, bonds and commodities.
New analysis4 from the bank reveals that despite the name of the two categories – Cautious and Balanced – many funds in these sectors have had high levels of risk, as measured by volatility. RBS analysis of Cautious Managed funds reveals that the 10 largest by assets under management saw their volatility rise significantly during the difficult market conditions of 2001 and 2008/9. During 2008, some funds saw their volatility double while a number of Balanced Managed funds had volatility levels in excess of 25%.
The Volatility Controlled Cautious Managed Fund from RBS aims to never exceed 10% annual volatility, and the Volatility Controlled Balanced Managed Fund aims to maintain annual volatility between 10%15%. The strategies for the two funds have been back-tested5 over the past 10 years and the average annual volatility level for the Volatility Controlled Cautious Managed Fund would not have exceeded 6.8%, with an average nearer to 5%. The corresponding figures for the Balanced Fund are 13.1% and 11.5%.
Zak de Mariveles, Managing Director, RBS said: "There is over £40 billion invested in Balanced Managed and Cautious Managed funds, which represents 7.22% of the entire UK retail investment management industry6. Our research suggests that this is likely to increase dramatically as investors look to protect their savings from rising inflation and tax, whilst some investors also look to reduce the risk profile of their portfolio by choosing so called less risky funds. However, although many funds are marketed as Cautious or Balanced, unbeknown to many investors and financial advisers, they have at times seen significant swings in their volatility and returns. Greater transparency around this should be provided to retail investors and financial advisers, and we see this as a huge opportunity for RBS to take a lead in the market and offer two new funds that aim to tame volatility, whilst delivering growth.
New research highlights growing markets but concern about fund volatility
New research1 from RBS reveals that IFAs put just under 44% of their clients’ money into Balanced and Cautious funds between June and December 2010, and only 8% believe this is likely to decrease between December 2010 and May 2011. Despite this level of popularity amongst IFAs, intermediaries on average claim that they are unable to recommend around one third of Balanced Managed funds to clients because they feel they are too risky, and the corresponding figure for Cautious Managed funds is 28%. Overall, 29% of IFAs said that they are ‘very concerned’ or ‘concerned’ about the fact that many investors don’t understand the risk profile of their Cautious and Balanced funds.
Despite these concerns, 2.66 million people are looking to increase the amount of money they have invested in the stock market over the next six months – 247,000 people intend to increase this by over 50%2. Nearly half of those planning to invest more (45% of respondents) said it was because they need to protect their money from rising inflation and tax, and 44% said it was because they wanted to save more for retirement2. However, 89% of retail investors describe their risk profile as ‘medium’ or ‘low’.2
The Volatility Controlled Managed Funds
The Volatility Controlled Managed Funds from RBS are built on four pillars:
- To maintain consistent volatility across the different risk profiles
- To ensure that they are transparent and easy to understand
- To deliver on performance
- To be competitive on charges
The Funds will aim to deliver capital growth while maintaining volatility at appropriate levels by focusing on diversification, trend analysis and volatility.
The Funds are designed to gain exposure to a broad mix of assets that best reflects the needs of investment growth-orientated investors who also require a level of protection against market volatility. Each Fund follows an investment style linked to stocks and shares, bonds, commodity and cash asset classes, designed to optimise returns within each Fund’s risk profile.
The Funds are designed to use the recent historical performance of the assets they gain exposure to in order to identify their trend. Once identified, the Funds change their asset allocation accordingly, with the aim of maximising returns.
Both Funds are designed to monitor their volatility on a daily basis. This is then compared to a predetermined range that aims to represent either a Cautious or Balanced risk profile.
If the overall volatility of a Fund appears to be moving outside of its predetermined risk profile, the exposure of the fund to the mix of assets changes automatically, with the aim of ensuring that the overall risk profile (as measured by volatility) remains within the predetermined range.
The annual management charges for the Cautious and Balanced Funds are both 1.00%.
Both funds can be used in an ISA, and the minimum investment is £1,000. You can add to the funds by a minimum lump sum of £500, or by direct debit of £100 or more a month.
Citigate Dewe Rogerson:
Tel: +44 20 7282 1031
Tel: +44 20 7282 2861