While a fund’s returns are easily found in fact sheets and advertising materials, little is known about the risks that were taken to achieve the returns. With risks having been in the spotlight in the past year, an initiative by the Federation of Malaysian Unit Trust Managers (FMUTM) will result in greater transparency regarding a fund’s volatility. \

With effect from this month, funds with a performance track record of three years or more will have to display the Fund Volatility Factor (FVF) in advertising and promotional materials that display returns, such as in fact sheets and brochures. The volatility factor, calculated by fund analysis company Lipper, is measured using the annualised standard deviation, and funds are then separated into five categories, from 'very low' volatility to 'very high' volatility. The requirement however, does not apply to funds for institutional or high-net-worth investors, or wholesale or closed-ended funds.

“Traditionally, risk was gauged through the asset allocation — equity funds are regarded as high-risk, while bonds are regarded as low-risk. But, certain equity funds may be less volatile than others, and the style of a fund manager plays a role, not just the asset allocation,” says Lee Siew Hoong, executive director of the FMUTM. “The FVF introduces an alternative way for investors to gauge how volatile a fund has been. Still, it is not a comprehensive evaluation and the unit trust consultant has to look at a person’s risk profile and investment time horizon.” Lee says the council decided on measurement using three-year rolling returns as unit trusts are a long-term instrument and the three-year period smoothens out volatility due to sudden market swings. 

“I think it’s good to let investors know the risk factor, as they tend to look at performance and not risk,” says Wong Boon Choy, CEO of MAAKL Mutual Bhd. “Volatility is one of the ways to measure risk. Investors may want to buy funds that match their risk profile rather than simply top-performing funds.”