It needn't be a risky business

Rachel Fixsen on selecting the right investment trust

Stunning past returns are tempting when you're looking for an investment fund. But can that performance be repeated? Some funds have managed to climb to such dizzying heights by relying on high-risk stocks, and if this is the case, news of past performance could be as treacherous as a siren song.

Knowing how to measure a fund's risk level has long been a basic requirement for professional fund managers. But smaller investors need to know too.

The Association of Investment Trust Companies breaks investment trusts into categories. Some categories are generally thought of as high-risk, such as emerging markets. But things are not that simple.

SBC Warburg publishes A Private Investor Guide to Investment Trusts. This gives trusts a low, medium or high risk label. Using its ratings, the guide tries to show that, for example, a fund in a traditionally high- risk category such as emerging markets may be lower risk because of its specific investment strategy.

"It's very important [to rate a fund for risk], because within a particular sector you might think you're dealing with like for like but one fund manager could be dealing with small stocks while another is buying blue chips," says Christine Ross of Abbey National IFA, the bank's independent financial advice arm.

"The past performance may be good, but what are the potential pitfalls?" she asks. Abbey National IFA has started rating investments in its own reports, giving them a mark out of 10 for risk. A building society deposit account is given a one, while Perpetual's UK Growth fund has a seven. With unit trusts, the mark is based on volatility, or standard deviation. Volatility shows how smoothly the price of units in a fund has risen. It is a measure derived from the changes to an investment fund's price over a certainperiod.

You can find out from an independent financial adviser what the volatility of a certain fund has been, or you can find the figures for yourself in specialist financial information publications such as MoneyFacts, which uses volatility numbers from performance data provider HSW.

Micropal, another performance data supplier, has its own system of star ratings for investment funds. These are based on a ratio of relative return and price volatility. But you have to look at these ratings carefully, because a high-performing fund which has been volatile might get a similar rating to one which has performed poorly but has low volatility. Micropal's star ratings appear in specialist publication Money Management.

Soaring performers in the league tables can come down to earth with a jolt if you take risk factors into account. Ms Ross points out that Prolific Technology, a top-performing unit trust, shines in the five-year performance tables. Annual returns average a massive 29 percent. But when the league table is adjusted for risk, Prolific Technology falls to 59th place, with Jupiter Income taking first place.

There are many other key factors when judging just how risky an investment is. For instance, the fund's price may have been relatively steady in the past, but if the fund manager has just changed or the fund's size has grown rapidly, this might change.

Ian Millward, investment marketing director at IFA firm Chase de Vere, says ratings from Standard and Poor's Fund Research is a starting point when recommending unit trusts to clients. It has a rating system which looks at a range of factors. S&P interviews fund managers to get a close look at the way investors' money is being used. Before they are included in the rating system, funds are filtered using tests such as how consistent their performance has been. Funds which are included are given the highest rating of AAA, middle rating of AA or least high rating of A. The company's researchers look at factors such as how well a fund has done compared to the rest of its sector and how many different shareholdings it has. It also scrutinises volatility levels.

"Most investors just look at the charts to see which the best fund is and go with that," says Mr Millard. "But it should be a case of matching your investment attitude to risk with that of the fund."

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Will your credit card rewards be scrapped following new EU rules on charges?

Providers are unhappy with new EU rules - but ultimately it is customers who will have to foot the bill
There remain more than a million unclaimed Premium Bond prizes worth collectively around £48m

Have you won £1m in the May Premium Bonds draw?

More than £60m was paid out to more than 2 million prizewinners this month

The 0 per cent introductory deals that credit cards offer are one of the most odious tricks

Beware credit card firms’ odious tricks

Why can’t we just have open and honest charges, without all the cross-subsiding?

The pound’s recent strength against the euro could be hit by economic uncertainty under a new government

How planning can make your travel cash go further

With the pound at a high against the euro, it pays to buy now before uncertainty post-election

Put the phone down on the coldcallers who see pension liberation as an opportunity to liberate your pension from you

Pension freedoms: How to deal with cold calls from scammers

Sean O'Grady offers advice on keeping your money safe
Switching to a better bank account is much easier than it used to be

More people are switching current accounts – but what do the figures mean?

Experts disagree about the 7% increase over the past year

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The firm’s revenues slumped by a third to £217 million in a disastrous 2014

Wonga results could get even worse this year, chief admits

The firm’s revenues slumped by a third to £217 million in 2014

The cost of a buildings policy has dropped by 10.1 per cent over the year, with the cost of a contents policy falling by 8.2 per cent

Simon Read: Mild winter cuts the cost of home insurance

The average quote for a buildings and contents policy has fallen by 3.6 per cent

Don't count your retirement money yet: employers will stop receiving a pension rebate next year and their staff may lose out

Defined-benefit pension schemes: Rebate change in 2016 may leave you out of pocket

Employees in defined-benefit schemes are held up as the lucky ones, but the state pension scheme will be overhauled in April 2016
Labour will raise the national minimum wage to more than £8 an hour by October 2019 (EPA)

Barclays new Blue Rewards hands cash to customers. What’s the catch?

Joining Barclays Blue Rewards costs £3 a month but then lets customers in for handouts of up to £15 a month

New research reveals that despite the recovering economy, four out of five low-income households have seen no sign of their financial situation improving

Hard-up families could be eligible for financial help

A charity is urging anyone struggling financially to see if they could get help from the state

When is the best time to buy foreign currency?

Video: With an election looming, a hung parliament could hit sterling

General Election 2015: Vote for the party that will boost your finances

Experts warn that the general election is unlikely to lead to stable markets. Simon Read talks to two investment managers who are advising caution

Make the most of your money in 2015-16: The end of the tax year is the beginning of the next...

The new tax year brings with it a raft of new rules and regulations
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

    £20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

    Ashdown Group: Marketing Executive - 6 month FTC - Central London

    £25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...

    Ashdown Group: Junior Project Manager (website, web application) - Agile

    £215 per day: Ashdown Group: Junior Project Manager (website, web application ...

    Guru Careers: Software Engineer / Software Developer

    £40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before