Our focus at FE is to support Advisers, planners and wealth managers in selecting the best and most suitable investment options for their clients. In addition to award-winning research tools on FE Analytics, we offer a set of simple, reliable and accurate ratings which can uniquely work together, whatever your investment style.
The scope of FE’s ratings includes funds, investment trusts, portfolios and managers providing valuable insight to validate an Adviser’s investment selection. Indeed, independent research published this month by the research agency Platforum found that 80% of Advisers that consume third‐party research and ratings for fund picking or building in‐house solutions use FE – the highest percentage of any company in the survey.
So how do FE’s ratings work and how can they support Advisers in fund selection and portfolio construction?
Perspectives on performance
FE Crown Fund Ratings
The FE Crown Fund Ratings are a quantitative measure covering the 200,000+ live share classes that FE collects worldwide. The ratings help to distinguish between funds that are strongly outperforming their benchmark and those that are not. Rebalanced twice a year in January and July, the rating takes into account three key measurements to derive a fund’s performance: alpha, volatility and consistently strong performance. The top 10% of the funds are awarded five crowns, the next 15% receive four crown and each one of the next three quartiles are given one less crown.
On FE Analytics, the powerful filter tool can help Advisers screen instruments across different universes based on their crown ratings to create shortlists of the best performing funds, especially useful when creating bespoke solutions for clients or firm level models.
FE Alpha Manager Ratings
A unique element of FE’s ratings proposition is the FE Alpha Manager ratings. To provide a more holistic approach to investment assessment, FE rates the Managers who are responsible for their consistent returns.
FE Alpha Manager Ratings rate the performance of a fund manager over their career including all funds they have managed and places worked. They are designed to distinguish fund managers who have consistently performed well over the longer term by monitoring risk adjusted alpha/Sortino (with track record length bias) and their consistent outperformance of a benchmark overall.
The FE Alpha Manager rating has gained considerable acknowledgement and credibility within the industry. The ratings are displayed on factsheets on FE Analytics and are useful to export and send to clients as part of initial or review reports.
FE Passive Ratings
Whilst seeking Alpha and enjoying the benefits of active management is a favourite amongst many Advisers, some Advisers rely on passives for their cost and lower risk benefits. To help such Advisers verify the consistency of the numerous options available in the market today, FE recently launched the FE Passive Fund Rating. The rating awards between one and five Passive Crowns, based on the instruments ability to track its index over a three-year period. More specifically the crowns are determined based on an absolute score based on the tracking difference, tracking error and fund size.
It should be noted that passive funds generally have a much more focused objective than active funds, with the result that the range of outcomes is narrower for passives than for actives. Consequently, the performance differences between top and bottom rated funds are narrower for passives.
The rated passive funds are easily accessible via a dedicated Passives universe on FE Analytics and are classified into sectors. The wealth of indices data available in the system also allows for comparisons.
Assessing the risk level of an instrument is key to understanding it’s suitability but communicating relative risk to clients can be a challenge for many advisers.
The FE Risk Scores were created to provide a single, easy to understand measurement of the relative riskiness of individual investments or even an entire portfolio. In contrast to many other risk measurements they are sensitive to market conditions and are robust barometer that measures relative rather than absolute risk. The Risk Scores are also immensely flexible - covering the majority of investment types in one measurement tool.
FE Risk Scores for funds & sectors: FE Risk Scores define risk as a measure of volatility relative to the FTSE 100 which has a fixed risk rating of 100. Cash has a fixed reference score of zero. Instruments more volatile than the FTSE 100 have a score above 100 and vice versa, giving a reliable indication of relative risk.
Portfolio Risk Scores: FE also rates the overall risk level of a portfolio. More often than not, the portfolio’s Risk Score is likely to be lower than the individual holdings, demonstrating diversification benefit.
Through the Risk Scores, the historic risk level of a portfolio or selected instruments can be charted.
The chart below plots an example portfolio alongside its individual components over a three-year period.
Adviser Fund Index
FE does not rely on its own understanding of excellence and works with Advisers to understand the reals ‘goings on’ within the industry, giving birth to the FE Adviser Fund Index.
The Adviser Fund Index (AFI) is made up of the recommended portfolios of a panel of leading UK financial advisers. The portfolios are spread across the AFI Aggressive, AFI Balanced and AFI Cautious and are available on FE Analytics as indices. Based entirely on the funds actually recommended to clients, the FE AFI index carries real-life credibility, providing insight into the benefits of holding top quality funds.
Advisers can look for funds recommended by this influential panel for reassurance or new ideas in fund selection.
Quant meets Qual – FE Approved list
The FE Approved List is FE’s list of funds that our Research team have approved and that form the basis of FE’s own model portfolios. The list is selected by drawing on quant ratings alongside qualitative analysis by our skilled team of analysts who conduct in-depth analysis on the shortlist by interviewing fund groups and managers.
The comprehensive quant + qual approach removes all traditional biases and selects the best of class from all corners of the investment market from the largest household names to the more focused specialist investment houses. Continuously reviewed and frequently updated, FE Invest Approved Fund List is dynamic and responsive to ensure it always signifies today’s best fund choices.
Addressing the FCA’s concerns with ratings agencies
In the recent past the FCA has been vocal about concerns over the integrity and increasing influence of ratings agencies on Adviser fund due diligence/selection and inadvertently on competition between asset managers within the industry.
As a completely independent provider of research, FE’s ratings draw on 20 years of investment data collection history. Our ratings are completely impartial and no payment is taken to be rated.
Contact us at firstname.lastname@example.org to find out more.