Royal Bank of Scotland (RBS) has launched two new managed investment funds that will limit volatility to control the riskiness of the investments.
The new cautious managed and balanced managed funds will be lower cost too – the annual management charge of the funds are 1% and the total expense ratio (TER or the total annual cost of the fund) is estimated to be 1.2%, much lower than the average cost of similar investment products.
In an innovative step, RBS are aiming to cap volatility, a key measure of riskiness in an investment fund – the Volatility Controlled Cautious Managed fund will never exceed volatility of 10% and the Volatility Controlled Balanced Managed fund will maintain volatility of between 10% and 15%.
While this is an improvement of many so-called ‘cautious’ funds, Which? believes that funds labelled ‘cautious’ and ‘balanced’ can be very misleading to consumers. We are also concerned that RBS will continue to sell its older cautious and balanced funds that do not have risk controls within its branches.
What’s the problem with managed funds?
A managed fund invests in a number of different assets to provide a one-stop shop for a diversified portfolio of investments. They usually combine equities with bonds and other assets like property and commodities.
Recent research carried out by Which? Money found a number of problems with funds labelled as cautious. The major issue is that the term caution has a very open interpretation – what’s cautious to you might not be the same as what a fund manager or product manufacturer might think.
With a cautious fund you risk getting shoehorned into a product that is not designed for your needs. We found that many ‘cautious’ funds had an average of 42% invested in equities, the asset class that carries the highest risk. And in many cases, this is not suitable for investors who see themselves of cautious. Our research found that cautious investors prioritise the safety of their money over high returns and have a low tolerance for loss. But a high weighting in equities can put your money at higher risk.
The new RBS cautious fund will have a 54% investment in equities, while the balanced fund will have 71% invested in equities.
Why has RBS launched these new volatility controlled funds?
Volatility is a key measure of the riskiness of an investment. Volatility measures the fluctuation in the price of an asset or portfolio. If the value fluctuates a lot of a short period of time, it has a high volatility and, consequently, higher risk.
Research from RBS has found that many funds in the cautious and balanced sectors have a high volatility. Our research corroborates this – we found that some funds in the cautious managed sector were as risky as those investing in emerging markets, like China and India.
RBS will control the volatility by reducing exposure to the riskier assets automatically in their funds to ensure that volatility does not exceed the preset levels of the funds.
Are the new launches a good thing?
In our recent investigation into cautious managed funds, we expressed concern that funds called ‘cautious’ were labelled on a scale of risk yet did not target risk management in the way that they were run. So, RBS’ new launches are an encouraging step forward for the sector.
But we still have many concerns over managed funds and their offer of a diversified portfolio all in one product. An investment portfolio should be tailored to the investors’ needs and financial goals and many all-in-one products are not bespoke for each individual investor. We believe that cautious investors seek independent financial advice and build a portfolio of investments that is suited to them.
A good example of this is the record £7.7m fine Barclays received for recommending 12,000 elderly invest in cautious and balanced funds, for many of whom the investments were inappropriate.
Conflict of interest with new and older managed funds
In addition to this, RBS is continuing to sell its older, non-risk managed cautious and balanced funds, which we believe can be misleading to consumers. It seems that RBS has identified a problem with cautious and balanced funds and offered a solution with the new launches, but is still selling funds with the very problems it has identified. We believe there is a conflict in doing this and could lead to investors making poor investment decisions.
We asked RBS about this. David Lake, head of UK sales, said: ‘The new Volatility Controlled Managed Funds from RBS allow investors to address an important aspect of risk – volatility – which has been difficult for investors to achieve until now.
‘While this welcome new RBS innovation has been very well received, we anticipate that there will be ongoing demand for traditional, active and passively managed funds such as those offered by RBS more widely.’
For more on our investigation into cautious funds, read the February edition of Which? Money.
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