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New tool seeks to match investor risk and reward

New tool seeks to match investor risk and reward

Once you hand your hard-earned cash over to a fund manager they can invest it in an array of financial instruments including bonds, shares, derivatives and exchange traded funds (ETFs). But do the returns you receive justify the amount of risk taken by your fund manager?

InvestorBee, an investment analysis group, measures risk and returns by looking at how 1.4 million UK pensions are invested.   

By analysing what the portfolios are invested in, InvestorBee calculates whether the level of risk taken is justified by the returns and has created five risk categories to classify different investment strategies.

Stable, or less risky, assets include cash and bonds. Growth assets, which are rated as more risky, include equities, property and commodities.

Five risk levels: Click to enlarge

InvestorBee's five risk groups are:

1. Low risk

A cash-heavy strategy, which will be affected by low interest rates. An investment of £100 would have increased to £103 over the past three years.

2. Medium-low risk

An investment with a modest level of risk. Gives an incremental return of +£23 over the past three years, proving to be more effective than a low-risk holding.

3. Medium risk

Medium-risk investments have given an average incremental return of +£33 over three years.

4. Medium-high risk

Investments in this risk category have given less impressive returns than medium-risk funds, with an average incremental return of +£27 over the past three years. A slide in equity markets in 2011 was the main reason for this.

5. High risk

This category is 97% invested in equities and recovered in the early part of this year to make it the most rewarding benchmark over the past three years, with average returns of +£36 on a £100 investment.

Based on the risk categories InvestorBee also makes recommendations on funds with the highest returns, most consistent performance, the lowest-fee funds with a total expense ratio (TER) of less than 1.5%, and the best high-fee funds with a TER of more than 1.5%. The following are the funds highlighted by InvestorBee, containing a few Citywire Selection Star Picks and a number of Citywire-rated managers.

Category High risk Medium-high risk Medium risk Medium-low risk
Best Net Returns Henderson Global Innovation Unit Trust M&G Global Dividend Fund Newton Global Higher Income Aberdeen Managed Distribution Fund
Most Consistent performer Investec Global Dynamic A Acc Net GBP Baillie Gifford Managed Fund Troy Trojan Capital I Acc Aberdeen Managed Distribution Fund
Best Low Fee Fund (<1.5% TER) L&G (Barclays) Worldwide Trust Veritas Global Focus Fund L&G Global Health & Pharmaceutical Index Trust Aberdeen Managed Distribution Fund
Best High Fee Fund (≥ 1.5% TER) Henderson Global Innovation Unit Trust M&G Global Dividend Fund Newton Global Higher Income Jupiter Merlin Income Portfolio

*Funds selected by InvestorBee. No low-risk, or cash equivalent, funds selected. All total returns figures are calculated on a three-year basis as at the end of June using Citywire data.

Medium-low risk funds

Aberdeen Managed Distribution is selected by InvestorBee as the fund with the best net returns, the most consistent performance, and the best low fee fund in the medium-low risk fund sector.

It is run by Citywire-AA rated manager Michael Turner and is a mix of equities and bonds with top holdings in a range of Aberdeen bond funds and defensive stocks such as British American Tobacco (BAT.L). It has given total returns of 48.15% over the past three years, consistently outperforming the Lipper Composite Indices Mixed Assets index's total return of 37.9%.  

The Jupiter Merlin Income portfolio is selected as the best high-fee fund for the medium-low risk sector. The fund is a Citywire Selection Star Pick and managed by John Chatfeild Roberts. It’s a fund of equity and fixed income funds, as well as range of ETFs. The fund has given total returns of 38.01% over the past three years to outperform the Lipper Composite Indices Mixed Asset index's total return of 37.9%.

Medium-risk funds

The Newton Global Higher income fund, a Citywire Selection Star Pick, is selected by InvestorBee as the best net return fund and the best high-fee fund. It is managed by James Harries and has posted total returns of 54.9%, outperforming the MSCI World's total return of 45.9% over the past three years. The fund has core holdings in defensive equities such as tobacco and pharmaceuticals.

Troy Capital I Account is highlighted as a medium-risk fund with the best consistent performance. The mixed asset fund is managed by Gabrielle Boyle and has top holdings in Microsoft and Unilever (ULVR.L).

The Legal & General Global Health & Pharmaceutical Index trust is named as the best low-fee fund in the medium-risk sector. Joseph Molloy oversees the fund, which has given total returns of 50.1%, underperforming the MSCI World Health Care index's total return of 57.5% over the past three years. The fund’s top holdings are in Johnson & Johnson and Pfizer.

Medium-high risk funds

The M&G Global Dividend fund is chosen by InvestorBee as the best net return and high-fee fund in the medium-high risk sector. Citywire AA-rated manager Stuart Rhodes oversees the fund. Its top holdings are in international equities such as Chubb Corporation and Wal-Mart Stores, and the portfolio has given total returns of 64.9%, outperforming the benchmark FTSE World total's return of 45.2% over the past three years.

Baillie Gifford’s Managed fund is selected as the most consistent performer in the medium-high risk fund sector and is managed by Lorna Kennedy. The portfolio has given total returns of 49.7% over the past three years, outperforming the Lipper Composite Indices Mixed Asset index's total return of 41.8%. Its top holdings are a selection of Baillie Gifford funds and defensive stocks such as BG Group (BG.L) and British American Tobacco.

The Veritas Global Focus fund is highlighted as the best low fee fund among medium-high risk funds. It’s managed by Andy Headley, a Citywire Selection Star Pick manager. The portfolio is invested in global equities such as pharma group Roche and Vodafone (VOD.L) and has given total returns of 50.66% over the past three years, to outperform the MSCI World total returns of 45.9%.

High-risk funds

Henderson’s Global Innovation Unit Trust is named as the fund with the best net returns and the best high fee fund. It is managed by Stuart O’Gorman, a Citywire Selection Star Pick manager. The fund has given total returns of 62.9%, outperforming the MSCI information technology index's total return of 59.2%, and has top holdings in Apple and Vodafone.

The Investec Global Dynamic A Acc Net GBP fund is highlighted as the best high-risk fund with the most consistent performance. It is managed by Ian Vose and has top holdings in UnitedHealth Group and tobacco company Altira Group. It has given a total return of 42.3%, underperforming the MSCI World index's total return of 45.9%, over the past three years.

Legal & General (Barclays) Worldwide trust is chosen as the best low-fee fund in the high-risk sector. It’s managed by Kevin Chessum and has holdings in a range of other Legal & General funds and trusts. The fund has given total returns of 29.4%, underperforming the FTSE World's total return of 45.2% over the past three years.  

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