What is the Synthetic Risk Indicator (SRI)?

The Synthetic Risk Indicator (SRI) is an indispensable tool for assessing the risk and return profile of investment funds. As a standardized indicator, it makes it easier for both investors and advisors to compare the risk of different investment solutions.

In regulatory terms, SRI is anchored in the key information document (KID), which is part of the EU requirements for the Financial Markets Directive. These regulations aim to ensure transparency and uniformity in the presentation of risk indicators across Europe. This provides investors and advisors with a reliable basis for well-founded comparisons and decisions. The regulatory classification ensures that the risk indicators are consistent and reliable.

For funds, SRI means a classification based on their value-at-risk-equivalent volatility (VEV), which essentially corresponds to traditional volatility. It therefore represents the economic risk of a capital investment, as the value can fluctuate within a range of approximately twice the volatility.

A fund with a volatility of 0.5-5% is typically classified with an SRI of 2, which often applies to bond funds. These funds have a loss potential of around 10%. An SRI of 3 corresponds to a volatility of 5-12%, while an SRI of 4 covers a range of 12-20% – this classification usually includes equity funds, which can have a loss potential of up to 40%.

Diversification: more opportunities with the same risk

While single-class equity or bond funds are often classified with an SRI of 4 or 2 respectively, diversification offers a clear advantage for mixed funds. Through the targeted combination of different asset classes, the risk/return profile can be significantly optimized compared to single-class funds. This advantage is due to the negative correlation between equities and bonds: Bond markets tend to benefit as a safe haven during falling equity markets, while they become less attractive when equity markets rise.

Thanks to this negative correlation, a portfolio with well-combined asset classes can have a lower risk than would be expected if the individual risks were simply added together. This shows how diversification can help to minimize risks, although careful analysis and strategic selection of asset classes is always necessary to achieve the desired effect.

It all depends on the right combination

Not all asset class combinations are equal, as the following example illustrates: a mix of 25% European equities and 75% European government bonds has a historical volatility of around 5.6%, which corresponds to SRI category 3 and therefore represents a higher risk profile than a comparable bond index.

However, by adding asset classes such as global corporate bonds, government bonds, covered bonds, global equities and alternative investments such as gold, the risk could be reduced by around 20% to 4.5%. The result is a portfolio that falls comfortably into SRI class 2.

Diversification therefore makes it possible to significantly reduce the value fluctuation potential of an investment, while at the same time riskier investments open up an additional return opportunity for the investor. For our strategies, we use a proprietary model that combines economic and capital market data to estimate the future performance of a portfolio and effectively manage risk. This model helps us to find the necessary balance between risk and expected return and to offer investors sound, well-founded investment solutions.

Sustainability as a risk management strategy

The EB – Multi-Asset Conservative is characterized by a bond ETF-equivalent SRI of 2, while at the same time offering an additional 25% equity potential. The fund invests in numerous asset classes worldwide, including equities, bonds, gold, photovoltaic systems, wind and hydroelectric power plants. Without the vehicle of a multi-asset fund, some of these attractive asset classes would not be accessible or liquid enough for many smaller investors. Overall, the broad diversification helps to make the portfolio robust and generate uncorrelated returns. However, the diversification in EB – Multi-Asset Conservative is not only made up of different asset classes, but also of an uncompromising focus on sustainability factors. The individual securities invested in can harbor event risks that significantly increase the volatility of a portfolio and which must be avoided.

As a pioneer in ethically sustainable investments, we also take financial, ethical, social and environmental aspects into account in all of our investment strategies. Integrating ESG criteria into the investment process reduces the risk posed by companies with sustainability deficits. Even after applying the negative filter based on the guidelines for ethical and sustainable investment in the Protestant Church(EKD guidelines) and the United Nations Sustainable Development Goals (SDGs), we have a very large investment universe at our disposal.

We also use an innovative AI-supported process. Our in-house developed EB ESG Score enables us to take a forward-looking view of the sustainability of companies. For this purpose, a comprehensive, fundamental sustainability assessment of traditional ESG ratings is combined with a news-based sustainability indicator. In this way, sustainability also pays off financially.

Fund-related risks

• Susceptibility of shares to fluctuations
• No guarantee of success for single value analyses
• Possible risks through active management
• Currency losses possible with global investments

Legal information: This information is a marketing communication and not an investment strategy recommendation or investment recommendation pursuant to Section 85 WpHG in conjunction with Article 3 (1) No. 34 or No. 35 of Regulation (EU) No. 596/2014. Accordingly, this information does not meet all legal requirements to ensure the impartiality of investment strategy recommendations and investment recommendations and is not subject to any prohibition on trading prior to the publication of investment strategy recommendations and investment recommendations.

All information is for general information purposes only and does not constitute investment advice or any other recommendation. All information and opinions presented are based on publicly available data at the time of writing and may differ in the future. Past performance and forecasts are not a reliable indicator of future performance. Further information on the opportunities and risks of the funds we manage can be found on the website www.eb-sim.de. The sales prospectus and further information are available at https://fondsfinder.universal-investment.com .