Endowus has launched a new product risk rating (PRR) system, in tandem with our new fund selection interface, to help guide our clients in better understanding the risk levels of different funds on the New Fund Smart platform.  

In addition to our process of screening, pre-selection and due diligence, this is one of the most value-added features of curation for the Endowus Fund Smart platform. The Endowus Investment Office searches through thousands of funds available in Singapore and around the world to identify the best-in-class for each asset class, geography, sector and style — to use as building blocks for portfolios for both core and satellite allocation. Fund Smart now houses over 100 of the industry’s top funds, sometimes exclusively on Endowus, and at the lowest cost possible.

But first, what is risk and why measure it?

Risk is a term that can be commonly heard in our conversations in everyday life. Sometimes it is related to everyday life events, such as the risk associated with taking a flight or trying a new sport. It can also be related to something as mundane as food selection — going to a restaurant we have never tried can even be considered risky. The world of finance and investing is synonymous with risk. It is probably the area of our lives where risk is discussed more often than any other. But unlike the risks in everyday life, in finance, risk is a very specific and quantifiable measure.

However, at the same time, there is no single methodology that is universally recognised as the ultimate measure of risk. Rather, there are many common methodologies utilised in finance to measure risk in financial markets. Some of these common methods you may have heard of. These include volatility, standard deviation, downside risk, 12 month worst outcomes, value at risk (VAR), and the list goes on.

What risk means to you as an investor

However, to boil it down to the most basic concepts — there are two things that measuring risk is trying to achieve. Firstly, it is trying to ascertain whether your investment directionally will go down (or up). Secondly, to measure risk is to find a way to ascertain the probability of that negative outcome.  For most people, simply put, the most important quantifiable risk is the chance of losing one’s money.

That’s why at Endowus, we apply a risk assessment to ascertain the appropriate level of risk for a certain investment product or portfolio — for each individual. While measuring risk is quantitative, there is obviously a subjective and qualitative aspect to risk, as each person has a different risk appetite depending on their own personal profile, purpose of investment and wealth goal.

So what is the Endowus Product Risk Rating?

This rating system has been developed in-house by the Endowus Investment Office and has been created to be intuitive and simple for any investor. It allows an investor to use it as a tool to screen by the levels of risk that each underlying fund has, commensurate with what the investor is searching for.

The new rating will rate all fund products that are on the Fund Smart platform with a rating from 1 to 6, with 1 being the lowest risk rating and 6 being the highest. These are individual fund level risk ratings and not portfolio level risk, so investors can take a granular view in identifying their best options. The rating scale utilises metrics that are deemed most appropriate in assessing the level of risk for individual investors to help them in selecting their funds.

Sliding scale chart of investment risk from 1-6

The Methodology for Product Risk Rating

Quantitative and systematic rules

Endowus Product Risk Rating is based on a weighted sum of three measurements of risks applied to the oldest share class of the target fund. A composite risk score for the fund is then calculated. The funds are ranked based on their composite risk score and are categorised into a risk classification of 1-6. The 3 key metrics we use are as follows:

1. Volatility of the fund
Volatility measured by standard deviation since the inception of the longest available share class of the fund. With this measure we are trying to see how volatile the fund has been in order to achieve the returns it has historically generated.

Normally there is a direct correlation between risk and return. Thus if you are taking greater risk (measured by volatility) you would expect to be compensated by a higher level of returns. This risk-adjusted return is the basis for measuring the effectiveness of the funds using ratios such as the sharpe ratio or the information ratio. Therefore, beginning with an accurate assessment of risk is important. Volatility can be reduced by the time duration of the investment. The longer one invests, the closer one can expect to reach the long-term average returns that have been achieved, despite short-term volatility.

If investors select a random time to redeem or sell a fund that is highly volatile, there is a risk that they sell it at a relative low, and thus incur losses. Therefore, knowing that a fund is highly volatile would allow investors to be more patient and long-term in their investment horizon, whereas low volatility investments can be redeemed with a shorter investment timeframe and with less deviation from long-term average returns.

For each fund, the risk measurement metrics are computed and converted into a percentile rank (0-1) against the Endowus approved fund universe. For volatility, the lower the number, the lower the risk. The range of volatility for each category is as follows:

2. Worst historical drawdown within a 12 month period
12 month rolling worst outcomes It is the worst outcome in any rolling 12 month period since inception of the oldest share class of the fund. We look at 12 month returns starting every month in its history and look at how the fund did 12 months later. After looking at all possible options starting from each month, we select the one month which — after 12 months have passed — had the worst return outcome. This is the 12 month rolling worst outcome.  

We assume that investors are taking a longer-term view with their Endowus portfolios and investing in underlying funds for more than 12 months. While this may not always be feasible, and for certain products — such as short-term cash management and short duration fixed income funds that make up the Cash Smart solutions — their low volatility nature means their 12 month rolling worst outcomes may not be that bad or may even be positive. For all other funds, a 12 month rolling worst outcome allows for another measurable and meaningful information in deciding the right risk level for investment.

For each fund, the risk measurement metrics are computed and converted into a percentile rank (0-1) against the Endowus approved fund universe. For the rolling 12 month worst outcome, the higher(less negative) the number the lower the risk.

3.Maximum historical drawdown within any time frame
The maximum drawdown number historically. A drawdown is a decline in the net asset value of  the fund or a period of negative returns. The peak to trough fall during any given period is called the maximum drawdown (MDD) of a fund. This can happen at any time in the fund’s history, and every fund will have a different time at which it may see a maximum drawdown. The worst drawdowns or MDD normally occur during major market shocks such as the 2008/9 Global Financial Crisis or during the 2020 Covid-19 induced market disruptions for both equities and fixed income markets.

We use the MDD data to ascertain what the worst peak to trough loss a fund has experienced in its history, and specifically the two recent times of market disruption in 2008/9 and 2020, to see how the funds performed during those times. Many funds do not have actual historical data going back to 2008/9 due to their short histories, in which case the 2020 number and the 2008/9 performance of its asset class of similar funds are important sources of information to assess together with the actual data to see what rating it should be classified under. We use this as an additional metric to the 12 month rolling worst outcome. This is because we can never time the markets, and the maximum drawdown may happen at any time, and we do not want our investors to take action when they should not — especially during times of panic or stress in markets.

For each fund, the risk measurement metrics are computed and converted into a percentile rank (0-1) against the Endowus approved fund universe. For the maximum drawdown numbers, the higher (less negative) the number the lower the risk.

Asset Class & Type of Funds in each Risk Rating

Qualitative rules-based overlay

While the Endowus PRR primarily uses a quantitative and systematic rules-based approach to the calculations and ratings, we have to apply qualitative overlays when the data is insufficient, because the fund does not have enough of a track record to correctly assess some of the metrics needed to calculate the quantitative scoring. This could result in misleading assessments of the risk each fund may have. For example, a country or sector fund with 3 years of track record may have a very low volatility, as markets have been trending upwards in the past few years, and thus understate the potential downside risk in a maximum drawdown scenario like in the 2008/9 Global Financial Crisis or during the March 2020 Covid-19 induced market fall.

However, this qualitative overlay process is still rules-based and must be backed up by fundamental rationales. Generally, funds that belong to a similar type would exhibit similar risk characteristics, and certain types of funds have higher / lower risk compared to other types. For example, an equity fund is typically more volatile than a fixed income fund. Within the equity fund universe, a global equity fund would be less volatile and have smaller drawdowns compared to a regional equity fund such as a China equity fund. These risk characteristics are linked to the asset class the fund invests in (e.g., bonds or stocks), the economic fundamentals of the geography & sectors the fund invests in, the style of the fund (defensive or aggressive), etc.

Therefore, the guiding principle for the qualitative overlay is the assessment of the type of the target fund. The table above maps different types of funds to each risk rating. As you can see, funds exposed to riskier assets (e.g., higher yield bonds) belong to a higher risk rating than funds exposed to safer assets (e.g., cash). Unsurprisingly, the results from our quantitative process are consistent with the mapping, which attests to the robustness of our process.

Why you would want to you use the risk rating

To understand the risk level of different funds

Previously, it was more difficult to compare the risk levels of different funds based on the information that we provided on our platform. Information on funds’ volatility and drawdown was not readily available. Now, you have a single quantitative matrix to compare across funds.

To sort funds of similar risk profile

You may have a preference to only invest in funds of a certain risk profile. With the new fund selection interface, you are able to sort the funds based on risk level before looking into fund-specific details like historical returns or asset allocation.

To expect more from your investment advisor

While there is no regulatory requirement for Endowus to provide a risk rating for individual funds or products, we have introduced the new rating to help our investors easily search similar risk levels of investments, understanding the correlation between risk and return. We also want to move ahead of any minimum requirements or regulatory requirements to introduce new high standards upon ourselves to meet the needs and enhance the experience of our clients and investors. The risk rating is visually shown in the newly launched investment fund list that can be found here. It is a great visual tool for easy reference and we hope that investors will find it useful and meaningful in their investment journey on the Endowus platform as we move to becoming the lowest cost fund platform for all unit trusts in Singapore.


Please note that the product risk rating (the “PRR”) provided is an internal rating assigned based on our product risk assessment model, and is for your reference only. The PRR was determined as 5 October 2021 and is subject to change from time to time. The PRR does not take into account your individual circumstances, objectives or needs and should not be regarded as advice or recommendation to purchase, hold or sell any fund or make any other investment decisions. Accordingly, you should not solely rely on the PRR in making your investment decision in the relevant Fund.