Amid deliberations over whether regulators should standardize risk disclosure for mutual funds and other investment products, the Investment Funds Institute of Canada (IFIC) has publicly released its latest annual update to its voluntary risk classification guidelines.
Late last year, the Canadian Securities Administrators (CSA) published proposals for standardizing the risk classification methodology to be used by fund companies in the new Fund Facts disclosure documents. The move came in response to complaints from investor advocates that the current approach to risk disclosure is inadequate. (See CSA seeks input on risk methodology for funds, investmentexecutive.com, December 12, 2014.)
The CSA is proposing a standard methodology as a way of providing more consistent, comparable risk assessments. It also sought comment on whether the methodology should be adopted as guidance for fund managers, or whether it should be mandated; and, it sought input about whether the proposed methodology could be used for other types of investment funds, such as exchange-traded funds (ETFs). The comment period on the proposals ended in March, and the comments are being considered by the regulators.
According to the CSA proposals, most fund managers current use the risk classification methodology developed by IFIC. Now, IFIC has released those guidelines publicly “in order to facilitate fact-based discussions on any proposed new models and their potential impact by ensuring all stakeholders have ready direct access to the methodology most commonly used by the industry.”
IFIC’s guidelines were developed by an industry working group, the Fund Risk Classification Task Force, back in 2003 and they have been updated annually since then. “These guidelines are designed to assist with standardizing terminology, categories, and volatility risk descriptions of funds. Standard deviation bands have been defined for each fund classification and respective Canadian Investment Funds Standards Committee (CIFSC) category to categorize a fund’s risk,” it explains. “CIFSC categories have been assigned to each of the five bands based on the rolling average historical standard deviation of the most closely related benchmark index to the CIFSC category.”
The guidelines explain the methodology, the classification categories, and the associated volatility classification for each fund category. They also set out how fund managers can use the classification system with their funds, and for dealing with alternative funds, or so-called “non-standard” investment strategies.