FE unveils new means to identify risk

FE has introduced FE Risk Scores, an easy-to-use tool that measures the stability of investments against a recognisable benchmark.

Unit trusts and OEICs, investment trusts, equities, life and pensions funds are all given a score which represents how risky they are relative to the FTSE 100, allowing investors to compare them on a like-for-like basis.

Even portfolios as a whole can be assigned a score, allowing investors to see exactly how exposed to risk they are.

FE Risk Scores define risk as a measure of volatility relative to the FTSE 100 index, which has a fixed risk rating of 100. Instruments more volatile than the FTSE 100 have a score of more than 100 and less volatile instruments have a score lower than 100, giving a reliable indication of relative risk.

Scores are recalculated weekly on a rolling three-year total returns basis, with all returns rebased to sterling. FE has introduced a decay factor, or lambda, so that older values carry less weight, thus making the score more responsive to recent events.

Most funds must have a track record of at least 18 months to be eligible for an FE Risk Score and they will typically score between one and 150. Direct equities score over 100 and cash always has a risk value of zero.

Michael Holland, managing director of FE, says the tool will prove invaluable for advisers who are required to understand clients’ appetite for risk and explain the relative risk of investments.

"As financial advisers prepare for RDR by turning more attention to risk monitoring, our FE Risk Scores will provide a helpful guide," he explained. "Shining a spotlight on relative risk with this initiative complements the extensive range of performance data and analysis we already supply."

Kerry Nelson, managing director of Nexus IFA, welcomed the new tool. "In this environment it is critical that investors can assess risk in a meaningful and straightforward way, but until now many of the tools available have been far too complex for most investors to understand," she said.

"FE Risk Scores deliver an easy-to-use solution allowing investors to monitor their investments against a highly relevant and recognisable benchmark."