CSA signals preferred indicator for mutual fund risk

Currently, fund managers have discretion to select their own risk classification methodology. The CSA is considering the imposition of a standardized methodology to address investor advocates’ concern that the existing approach results in inconsistent risk evaluations and disclosure; which makes it tougher to make meaningful comparisons between different funds.

The CSA reports that it received almost unanimous support for the idea of adopting a standardized methodology, “so that investors can readily compare funds while providing a level-playing field for all mutual funds.” However, it notes that there are “divergent views” on many aspects of the CSA’s proposed methodology, which is based on standard deviation.

For example, the report says that while a majority of commenters agreed with the use of standard deviation as the risk indicator, some recommended that other measures would be more useful, such as value at risk (VaR), or conditional VaR; while others indicated that standard deviation may not be easily understood by retail investors.

The CSA indicates that standard deviation continues to be its preferred risk indicator. It also notes that it is continuing to assess the potential impact of replacing the existing five-category risk scale with a six-category scale. However, it isn’t drawing any definitive policy conclusions in today’s status report.

Instead, the CSA says that it will continue engaging with stakeholders and the self-regulatory organizations as it considers this policy. It does say that it expects to publish proposed rule amendments to implement a standardized risk classification methodology at some point in 2015.