Risk-based funds set to make deep in-roads

Speaking on the first anniversary of the launch of F&C's Lifestyle fund range, John Yule, Head of UK Retail Distribution at F&C said he expected to see significant momentum in the growth of risk-based funds in the UK market fuelled by developments in the regulatory and distribution landscape.

Mr. Yule pointed to the experience of the US mutual funds industry where, according to the Investment Company Institute, 'lifestyle' and 'lifecycle' funds have accounted for around two-thirds of the rapid increase in assets in funds of funds products over the past decade. He explained that 'lifestyle' funds are multi-asset portfolios designed to maintain a predetermined risk level to suit different categories of investor while 'lifecycle', or target-date, funds reallocate risk and assets over time as they work to a predetermined maturity date. The F&C suite follows the former approach.

"The 'lifecycle' concept certainly has merits, particularly for a more passive investor, but in a highly intermediary driven market such as the UK where advisers regularly engage with their clients, we feel the 'lifestyle' approach will gain more traction because it ensures that the intermediary retains the pivotal role of reassessing the appropriate risk-profile of the client as their circumstances change over time," said Mr. Yule.

The Next Generation of Multi-Manager

Mr. Yule added: "Traditional multi-manager funds have seen strong take-up with advisers in recent years but if the US experience is anything to go by, we feel that 'lifestyle' funds represent the next generation of retail multi-manager products. While others will inevitably follow our lead, F&C has first-mover advantage in this space and we are very satisfied with the progress to-date."

F&C argues that there are also very compelling reasons specific to the UK market why risk-based 'lifestyle' funds will become an increasingly important part of the investment landscape.

"Risk-based funds enable advisers to address a number of the concerns of regulators in a very practical way that helps deliver a robust investment proposition to their clients. In particular this includes the FSA's Treating Customers Fairly initiative which was recently identified as the top regulatory risk and priority for the coming year, ahead of financial crime and data security," explained Yule.

An Alternative to 'Distributor-Influenced' funds

Mr. Yule also pointed to recent comments made at a Cicero conference on platforms by Dan Waters, the FSA Director of Retail Policy, as an example of the regulators developing attention on intermediary investment process. In his speech Mr. Waters raised questions about "distributor-influenced funds" , where individual intermediary firms establish funds for their exclusive use and may be directly involved in directing either the asset allocation or fund selection. Mr. Waters warned that "there are some serious issues that firms should consider before going down this route" . In particular he cited potential "very significant" conflicts of interest and stated that the FSA's requirements on suitability were "out-come focused and hence firms need to take into account the fund characteristics, the risk profile and the charges" , warning that "we will take a very dim view of any firm that is returning to the bad old days of broker funds."

Mr. Yule commented: "We think the Lifestyle funds offer intermediaries a clear alternative which can considerably reduce the costs and risks of establishing own-product. In particular, a key strength of the F&C range is that independence is embedded at each layer of the process and there is no vertical integration of the complete process with a single provider."

He explained this in further detail by pointing out that the F&C funds have their asset allocation driven off Dynamic Planner, an independent risk-profiling tool rather than an in-house model, and that individual fund selection is based on a multi-manager process than enables selection from across the entire market. Thirdly, access to the F&C funds is available through multiple platforms, so that advisers retain choice over the most appropriate product wrapper and administrator.

"We are now actively seeking opportunities to make the funds available through additional life companies and platforms," concluded Mr. Yule.