The Canadian securities regulator, the CSA, has published for comment a proposed risk classification methodology for the use of mutual fund managers in Fund Facts documents.
The proposed standardised methodology is intended to address concerns by stakeholders regarding the lack of standardisation in risk disclosure, which could result in an inconsistent evaluation of risk and make comparisons between mutual funds difficult.
Fund Facts currently requires the fund manager of a mutual fund to provide a risk rating for the mutual fund based on a risk classification methodology chosen at the fund manager’s discretion. The fund manager must then identify the mutual fund’s risk level.
The proposed methodology, intended to measure volatility risk, would classify mutual funds based on the degree to which returns vary over time from the average return (standard deviation). Six risk categories would correspond to standard deviation bands and range from "low" (zero to two per cent deviation) to "very high" (over 28 per cent deviation). Calculations would be based on the monthly total returns of the fund and mutual funds would have to use returns over the past 10 years to calculate standard deviation. Mutual funds without a sufficient performance history would be able to use a reference index meeting certain criteria.
The CSA is accepting comments on the proposal until 12 March 2014.