How we approach risk in our model portfolios

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  • 02 mins 33 secs
Risk can mean different things to different investors. Portfolio managers Brad Vogt and Wesley Phoa, both members of Capital Group’s Portfolio Oversight Committee, discuss how the American Funds Model Portfolios® define and approach risk.

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Capital Group

American Funds video transcript: “How we approach risk in our model portfolios”

Kris Spazafumo: Wesley, with our array of objective-based portfolios — from growth, growth-and-income, distribution income to preservation and income — talk about the various risk measures that the Portfolio Oversight Committee is monitoring on a regular basis. Wesley Phoa: The key thing about risk, about investment risk, is that the right measure of risk — what risk means — depends on your investment objective. Risk for somebody who's in the accumulation phase, trying to build capital, means something quite different from somebody who is already taking withdrawals from their portfolio. So, we define risk metrics that are appropriate for portfolios with different objectives. And they might be risk of depletion for a withdrawal portfolio or risk of a substantial drawdown for a growth-oriented portfolio. In the end, the right definition of risk for a real person, I think, is failure to meet your objective. That's what we're trying to quantify in different ways when we're looking at different risk metrics. Kris Spazafumo: Which is very complex, depending on the objective of the portfolio and the time frame and the unique — Wesley Phoa: Yeah. It's complex, but it's very practical. It's not an abstract exercise for us. Kris Spazafumo: Brad, anything you'd add on risk monitoring? Brad Vogt: Well, I think what we're trying to do with these portfolios is have a combination of our active management and the ability to produce results superior to an index or a benchmark, net of fees, with the appropriate amount of flex, where the portfolio manager is in flexible funds, either multi-asset funds or funds where they can hold some cash when the market is at a higher valuation [and] can feed through that risk element. So, we want that to be organic in the portfolios, and the committee spends a lot of time constructing them so that we know how much flex there can be. But we think that risk control is better on the ground, opportunistically, when there's liquidity in the moment, than waiting for a committee to meet and weigh in on a tactical change. So, I think we have the benefit of both architecture and structure in risk control and dynamic, on-the-ground portfolio managers making judgments in those funds that have some flexibility, that help create the asset mix. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. The statements expressed herein are opinions of the individuals identified, are as of the date published, and do not reflect the opinions of Capital Group or its affiliates. The information provided is intended to highlight issues and not to be comprehensive or to provide advice. Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by the distributor of the American Funds mutual funds, which receives fees for distributing and servicing the funds. Information provided on this website is intended for use by financial advisors with persons who are eligible to purchase U.S.-registered mutual funds. Securities offered through American Funds Distributors, Inc. Any reference to a company, product or service does not constitute endorsement or recommendation for purchase and should not be considered investment advice. © 2018 Capital Group. All rights reserved.