If you have ever opened a Fund Facts sheet, you have seen a risk rating: a scale running from low to high, with one step marked. We publish figures for the same funds, and they will not agree with that sheet. Both can be right, because they measure different things.
What the sheet’s rating is
For mutual funds and ETFs, Canadian regulators have prescribed one method since September 2017. It takes ten years of the fund’s monthly returns, computes the standard deviation, and maps the result onto five categories. The level is set when the sheet is filed and reviewed at least once a year. Segregated funds are disclosed under a different regime. The Canada Life sheets we checked use a five-step scale of their own.
What we publish
Our risk tier is also a volatility figure. It covers one year instead of ten, and it is computed on total return, so the distributions a fund pays are counted in. Where the boundaries between our tiers sit is our own calibration, and we keep that to ourselves.
We rank on more than volatility
A volatility figure counts a 10% rise and a 10% fall as the same amount of movement. The person holding the fund does not see them that way. So our stability ranking also accounts for how far a fund fell from its high, and how long it stayed below it.
The second one is not on the sheet, and it is the easiest to picture. If at its worst a fund stayed below a previous high for fourteen months, you know roughly what holding it was like. A volatility of 12% does not tell you that.
Compared only against funds doing the same job
A fund’s standing is worked out against others in its own category, never across categories. Put every fund in one list and the bond funds come out on top every time, because they are trying not to move. You would learn which category moves less, and you knew that already.
One definition, three providers
We compute the same figures the same way across roughly nine thousand fund series from three providers. Each manager produces its own official numbers separately, and those numbers were never built to be compared with each other. Nobody gets excited about this part, but for anyone comparing funds from different providers it may matter most.
The cost of a shorter window
A year of data is noisier than ten years of data, and less precise. Our tiers move around more in turbulent markets than in calm ones. That comes from the window itself, and it is not a signal to act on. We keep a daily record so you can see when something changed. The sheet’s rating is republished too rarely to show you that.
When the history is short
The prescribed method lets a manager complete a fund’s missing history with the returns of a reference index they select. We do not. A fund we cannot measure gets no tier. It is labelled UNRATED and stays that way until we have the data. We would rather publish a hole than a number we cannot stand behind.
So which one is right?
The rating on the sheet is the one with legal standing. Ours is our own analysis, and it replaces neither a regulatory rating nor an insurer’s. We say so wherever we show it. Our figure will not match the one printed on your fund sheet, and it is not supposed to. The two use different data over a different period.
One limit worth naming
Many funds inside workplace plans are segregated funds. They are insurance contracts under a different disclosure regime, with guarantees and contract terms that no volatility figure describes. We do not identify which funds are which. Your plan documents do.