When creating a model portfolio the risk score for the individual funds are higher than the overall risk score of the portfolio. Why is this?

What you are seeing here is the diversification benefit of investing across a selected amount of funds. The example below shows the issue and the explanation given by our Actuarial team.

Our actuarial team have looked into the below investments and have identified that each of the individual funds have produced a 5 or a 5+ Risk score but as a overall portfolio this has produced a Risk score of a 4.

Ninety One Global Gold I Acc GBP fund is invested in Gold, and hence its 98.1% in commodities, whereas the other funds are equity based. (See the table below)

Fund Name	Fund Code	US Equity	Commodities	European Equity	UK Equity	Global Emerging Markets Equity	Japan Equity	Asia ex-Japan Equity	Cash
Royal London Global Sustainable Equity Z Acc	SFDB	59.730		11.750	17.180	9.040	2.300
Ninety One Global Gold I Acc GBP	AEE1		98.100						1.900
Dodge & Cox Global Stock Acc GBP	MCB2	53.550		20.000	9.800	11.900	2.600	0.250	1.900
L&G Global Technology Index Trust I Acc	L559	86.485		4.580		5.900	2.690	0.345

In general, commodities are not really correlated with equities, and their returns don’t move in sync, and they can be slightly negatively correlated in market stress scenarios.

So, the Ninety One Global Gold I Acc GBP fund is going to be diversifying away from the equity risk of the other funds (and vice versa).

The impact of this is that there is a small diversification benefit across the portfolio, hence the risk rating of the portfolio is lower than the straight average of each of the individual funds.