Head of proposition Graham Bentley acknowledges the Skandia Risk Profiling models are only a base to be built upon, but rubbishes suggestions that they are a "cop-out".
"The first thing most investors want to know before they go into an investment is how much money they could lose," said Bentley. "These models categorise asset allocation for different risk levels, and then it’s up to the individual to pick the best funds. The emphasis here is on volatility, not maximising returns."
"Evidence shows the vast majority of historic outperformance is down to the asset class you’re invested in. It’s all well and good saying you’ve got to pick the best managers, but it’s very difficult to consistently do that. These models make the job a little easier."
Bentley says there are many misconceptions about asset allocation models, particularly with regard to the impact of past performance.
He commented: "A lot of people think asset allocation is based upon past performance, but this simply isn’t true. They are based on projected volatility."
"Our model was designed by Professor Harry Markowitz back in the 1950s, and he got the Nobel Prize for it. Of course, the model is only as good as the data you put into it, and we have a global consultancy firm that predicts how asset classes will behave over a 10-year period."
"They take into account expected interest rate increases, inflation, tax rates and charges. People have criticised the allocation to bonds because interest rates are set to rise, but this model was put together with the assumption that interest rates are at 3 per cent, not 0.5 per cent," he said.
Bentley thinks criticism of fixed interest has been overstated, and says the best bond managers can still deliver attractive risk-adjusted returns.
"Although the asset allocation is put together by an external source, I think the criticism of bonds has been overdone," he continued.
"Holding equities at the end of last year was apparently a ‘no brainer’, but no one saw the Japanese earthquake and nuclear crisis coming. Equities are always more unpredictable than bonds."
"Fixed interest is a hugely complex asset class. Managers have the ability to move in and out of investment and non-investment grade, from corporate to sovereign and so on."
"The best managers can still add a lot of value. To say there’s no place for bonds anymore is incorrect."
Skandia launched six multi-manager funds on the back of its risk profiling campaign in April 2008. Manager John Ventre uses the Skandia model to construct the portfolios of the Spectrum funds, which target varying levels of risk. The funds are ranked from three to eight, with eight being the most aggressively managed.
Bentley says more and more investors are looking for funds that target volatility. The Spectrum range has attracted in excess of £900m since it was launched.
According to Financial Express data, only Skandia Spectrum 5 has returned more than the FTSE All Share over a three-year period, though all six are less volatile than the index over a one-year period.
Performance and volatility of funds vs index over 3-yrs
| Name | 3-yr returns (%) | 1-yr volatility (%) |
| FTSE All Share |
12 | 17.04 |
| Skandia Spectrum 3 |
11.55 | 4.8 |
| Skandia Spectrum 4 |
11.57 | 6.57 |
| Skandia Spectrum 5 |
12.02 | 8.4 |
| Skandia Spectrum 6 |
10.6 | 10.35 |
| Skandia Spectrum 7 |
8.98 | 12.17 |
| Skandia Spectrum 8 |
7.69 | 14.1 |
Source: Skandia
"I don’t mind if they have average returns, as long as they have the appropriate level of volatility. They do not try to beat any particular benchmark – fund selection and returns are just the icing on the cake," Bentley finished.