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Distribution Technology rating methodology

Distribution Technology Ltd (DT) is an independent financial services company that rates the volatility of M&G Episode Multi-Asset range funds.

DT risk-profile ratings range from 1 to 10, with 1 being the least volatile fund and 10 the most.

These ratings are based on data and information supplied by M&G for the period February to March 2012.

More about our methodology

The risk profiles assigned to funds are based on the neutral asset allocations and calculated volatilities using the upper and lower VaR targets.

DT also looks at other analytics:

  • Volatility, calculated from historical performance
  • Volatilities implied by a historical snapshot of asset allocations for the funds

The funds’ asset allocation limits are used to calculate estimates of minimum and maximum likely volatilities.

The correlations and volatilities used on the DT platform are derived mainly from historical index data for a representative index for each asset class.

The estimate of returns for equities, property and corporate bonds are calculated as a premium over gilts and then expressed as real returns (i.e. returns in excess of inflation).

In addition to analysing historical index data, DT also uses the following market data to arrive at expected return assumptions:

  • Yields on UK gilts - conventional and index-linked
  • UK corporate bond yields
  • Yields on global bonds
  • Equity earnings and dividend yields
  • Economic growth forecasts

The expected volatility ranges for each risk band are shown below.

Risk Profile Lower Boundary Upper Boundary
1 0.0% 2.6%
2 2.6% 5.2%
3 5.2% 7.8%
4 7.8% 10.4%
5 10.4% 13.0%
6 13.0% 15.6%
7 15.6% 18.2%
8 18.2% 20.8%
9 20.8% 23.4%
10 23.4% 26.0%

Source: DT as at 31 December 2012

Although M&G does pay to have our funds rated, the rating process is conducted independently by DT. These ratings are produced quarterly and are therefore subject to change, although it is unlikely that one of the ratings will change from quarter to quarter.

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