A recent spate of mutual fund risk changes have held the attention of the industry, as fund providers update their offerings amid their annual prospectus reviews. However, several recently heightened risk ratings buck the trend typically seen with funds this year, says an expert.
“I’ve actually been tracking risk rating changes for at least 18 months and for the 92 unique funds that I’ve been tracking, 70% of the risk rating changes have been risk reduction. I think the risk rating increases are more the exception, that’s been my observation,” says Dan Hallett, vice president and principal at HighView Financial Group.
Lenders that have upped risk ratings lately include Manulife, which increased the rating for both its Manulife Conservative Income Fund and Manulife Preferred Income Class funds from low to low-to-medium.
Stone Asset Management also recently hiked the rating on its Stone & Co Flagship Stock Fund Canada and Stone & Co Flagship Global Growth Fund to medium risk.
Hallett points to updated standard deviation methodology provided by IFIC, which provides the current benchmark for fund risk ratings.
“They’re running the standard deviation risk calculations, and in the announcements, just about every one says the changes aren’t due to policy changes or objective changes; the risk ratings are based on the IFIC methodology,” he says.
While IFIC’s guidelines are widely utilized as the standard today, a pending proposal to enforce a “best interest standard” from the CSA could shake up the current methodology – and bring about more risk rating changes.
“There may be some changes but the methodology and risk buckets aren’t all that different than what IFIC uses today. I think the one benefit from what has been proposed – I’d like to see them attack it a little differently – is that they’re using longer-term, 10-year standard deviation, They’re not numbers that are going to change very frequently; if you’re using a rolling three-year or five-year standard deviation, year to year, you could see a lot of variations. As a result, you see a reduction in the risk rating changes,” he says.
Risk rating changes announced for Stone Funds
Investment giant proposes mutual fund price change