Relative Risk

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS. Why do we say this? IT IS TRUE!

Yet many grading systems weight their scores mostly (or completely) on PAST risk and return data. If that data isn't indicative of future results, one might rightfully ask why consider it at all?

This is why the FUNDGRA+DES® methodology does not let past risk and return results dominate the grading routine. These results are considered in our routine only so you can see how and why other systems' high scores for things like past return or risk (you cannot go back in time to actually earn a track record) can be misleading, but the other criteria sufficiently compensate for outliers to expose what risk and return only grades do not.

Therefore, you will discover that many top rated funds in other systems should not be top rated at all!

It is important for you to understand that the risk ratings on this site are RELATIVE to the best fitting asset class (you can rate any fund relative to any other asset class if you want to and compare it to our recommended grades on the fund report card page). This means that there are very high risk funds in absolute terms that might have excellent risk grades because we are comparing the risk relative to alternatives you may use for a risky asset class.

Here is how the risk grades work. Say a fund's best fitting benchmark is Large Cap Blend (like the S&P 500). Also, assume that over some period of time the S&P 500 had a standard deviation (a measure of the volatility of returns) of 10%. If a fund's volatility matched the benchmark within 1% of the benchmark's standard deviation (i.e. 1% X 10% = 0.10% or 9.90% to 10.10%) it is graded average, or C as you would expect for a fund closely tracking the asset class return, such as an index fund for that same asset class.

To obtain an honor roll grade of B for risk, the volatility of the fund must be at least 4% less volatile relative to the appropriate benchmark, thus measuring the RELATIVE RISK of the fund and not its absolute riskiness! Because many funds hold some cash, which tempers the relative volatility, a high number of funds make honor roll grades for risk (sometimes 40% or more of the funds earn relative risk grades of B or better). This is sufficiently compensated for in our grading routine by the other criteria and how steep the curve is for high relative risk grades.

For example, while recently more than 42% of graded funds received a B or better for relative risk, less than 5% received an A+, which requires volatility of HALF of the benchmark. Even a grade of A- requires volatility that is 15% less than the benchmark (for example, if the benchmark volatility was 10%, it would take a standard deviation of 8.5% to earn a grade of A-).

On the flip side of our relatively generous risk grading scores, lower grades are assigned as the relative volatility versus the benchmark increases. For example, a fund is given a risk grade of F if it is 115% as volatile as the benchmark. Less than one in five graded funds received a grade of F for relative risk.