Advisers have welcomed the Investment Management Association’s decision to adopt the Association of British Insurers’ model for the managed sectors but some question the need for a fourth, more defensive sector.
In May, the IMA was criticised by fund managers and advisers when it revealed plans to rename the active, balanced and cautious sectors as managed A, B and C and to create a new managed D peer group for the least risky managed funds.
The IMA said the aim was to indicate that funds are “managed” and subject to manager discretion. Many in the industry claimed this did not add any clarity to the risk profile of funds.
In June, the IMA pushed back the implementation date for its managed sectors from July 1 to October 1 after members called for more time to respond to the proposals.
But it was not until last week that the IMA published its final conclusions, which largely align its proposals with the ABI’s mixed investment sector names.
The IMA cautious sector will become mixed investment sector 20-60 per cent shares and the IMA balanced sector will become mixed investment 40-85 per cent shares.
The percentages indicate the minimum and maximum exposure funds can have to equities. The IMA’s cautious and balanced sectors previously did not have a minimum equity level.
The IMA active managed sector will be called the flexible investment sector. The ABI equivalent is currently called mixed investment 60-100 per cent shares but the flexible investment sector will have no equity restrictions.
The IMA has replaced its proposed managed D sector with the ABI’s mixed investment sector 0-35 per cent shares. As well as the parameters on equities, funds in this sector must have a minimum exposure of 45 per cent to investment grade fixed income and cash. The changes will come into effect on January 1 and firms have until April 2012 to make the necessary adjustments to their funds.
L&G managing director Simon Ellis welcomes the IMA’s decision to adopt the ABI’s model. He says: “A short-term solution has been achieved with the harmonisation between the IMA and ABI. A lot of funds are being wrapped in life and pensions vehicles, so it is important they are aligned in terms of names and definitions.”
However, Ellis says the IMA and ABI need to go further in their scrutiny of individual funds. He says: “Adjectives such as cautious and balanced are being scrapped at sector level but the marketing material for individual funds must be looked at.
“There should be an industry-wide glossary of terms that explains words such as cautious, absolute return and target return. This would establish a safe harbour for providers and advisers, protecting them from regulatory action by creating some standard definitions of the most common areas of investor confusion.”
Fidelity Worldwide Investment investment director Tom Stevenson says the IMA’s new sector names give greater clarity to investors. He also praises the creation of the fourth sector.
He says: “The higher fixed income minimum of 45 per cent in the mixed investment 0-35 per cent shares sector and the requirement for investment grade fixed income means the sector will be a materially safer and defensive band.”
The IMA says it cannot comment on how many funds will be in the new sector as it is awaiting feedback from members.
But IMA director of markets Jane Lowe says: “Following consultation with our members, our expectation is that there should be sufficient demand for a mixed investment 0-35 per cent shares sector.
“There must be a minimum of 10 funds, which is widely considered an adequate number for a robust sector. To create a unified set of mixed investment sectors across insurance and investment funds, the IMA adopted the fourth sector to harmonise with the ABI sectors.”
Hargreaves Lansdown investment manager Ben Yearsley is not convinced by the creation of the fourth sector. He says: “Do investors need the defensive mixed investment 0-35 per cent shares sector when there is already the absolute return sector? There are a lot of IMA sectors to choose from.”
Bestinvest senior investment adviser Adrian Lowcock disagrees. He says: “Given the volatility in the market in recent years, there is demand for funds with low exposure to shares. The key is making sure there are enough funds in the sector – a minimum of 10 – to offer a choice.
“Although cumbersome, a minimum and maximum equity exposure in the managed sector titles will help investors better understand the risk profile of the funds in each sector.”