These reforms have left many investors reliant on their own resources, although there are others who simply prefer to run their money themselves.
To help you make better decisions, FE has developed a series of ratings that are independently derived through quantitative measures – meaning they are not based on opinion but on cold, hard numbers.
Here we look at some key features of those ratings and how to use them when building a portfolio.
What are FE Crown Fund Ratings?
The FE Crown Fund Ratings are based on quantitative analysis, not opinion, and rank funds from one to five.
The ratings take into account three key measurements to derive a fund’s performance: alpha, volatility and consistently strong performance.
The alpha is the value a fund adds to its benchmark, or the difference between the gains made by the fund and its benchmark.
Volatility refers to how sharply the fund's returns differ over time, with low volatility being considered low risk and therefore better.
Much significance in the rankings is placed on the consistency of outperformance.
This is based on historical performance relative to an appropriate benchmark, chosen by FE.
One of the key advantages of the rankings is they measure the fund relative to its own benchmark. On FE Trustnet you will find tables of the top-performing funds in each sector, but this is not always a fair comparison.
Sectors can have funds with widely different objectives and strategies, meaning that it isn’t really meaningful to compare them. FE’s research team carries out the analysis to find the most appropriate benchmark against which the fund should be measured.
Very occasionally, funds are not given a ranking if a suitable benchmark cannot be found. Otherwise, if a fund does not have a ranking, it is almost certainly because it does not have a three-year track record.
The top 10 per cent of funds are awarded five FE Crowns, the next 15 per cent four FE Crowns and each of the remaining three quartiles will be given three, two and one FE Crown respectively.
The ratings are rebalanced every six months, in February and August, which means you need to keep an eye on any changes as a lot can happen in half a year.
How should I use them?
The rankings allow you to see at a glance the funds that have done the best over the previous three years, giving you an idea of where to look once you have your asset allocation sorted out.
However, you need to bear in mind that three years isn’t very long. In fact, it is the minimum amount of time that most advisers would look at before recommending a fund, and some would want to see five or seven years’ history.
It is a good idea to look at the longer track record, too, to make sure that the recent outperformance is not temporary.
At the same time, it is important to remember that the ratings are based on historical data, that is to say what the fund did in the past.
There is no guarantee that the past outperformance will continue. Some funds consistently outperform their benchmark, while others outperform for a few years and then underperform.
What are FE Risk Scores?
The FE Risk Scores measure how risky a fund is relative to the FTSE 100 index of leading UK stocks.
The scores take into consideration the volatility of the portfolio and the FTSE 100 over the past three years, but more weight is given to recent performance to capture recent changes.
Funds with a track record of 18 months or longer will be given an FE Risk Score.
The FTSE 100 always has a score of 100, and cash a score of 0. Funds will typically score between 1 and 150 and equities higher than 100, sometimes much higher.
The scores are updated weekly, but are unlikely to experience big changes week by week thanks to the use of performance data going back up to three years.
How should I use them?
It is important to recognise that FE Risk Scores are recalculated weekly, meaning that they can change.
Investors will also need to look at the trend relative to other similar funds, and the asset class of that fund, to consider whether any action should be taken.
Nevertheless, changes over time, reflecting a change of riskiness relative to the large cap market, can be significant.
Certainly, one should review the trend relative to other similar funds, and the asset class of that fund, to consider whether any action should be taken.
From a fund factsheet you can pull up a small graph of an FE Risk Score over time by clicking on the score icon itself.
Our factsheets also include one-year and three-year volatility scores, which are used by investors and advisers and can supplement what you can learn from the risk scores.
Next week, FE Trustnet will be launching a series of educational guides aimed at the retail investor, which should serve as a reference guide for those who want to brush up on the basics of funds, and should hopefully help regular readers get the best out of the free content on this site.
