Label gazing

The Investment Management Association’s redefinition of the managed sector has caused an outcry from the industry as fund managers accuse the IMA of adding to the opacity of the labels.

The three-week consultation, which ends June 17, will bring heavy lobbying from the industry in an attempt to convince the IMA to reconsider.

Last week, the IMA set out plans to rename the active, balanced and cautious managed sectors as managed A, B and C and create a new managed D peer group for the least risky managed funds.

The IMA says the labels indicate that funds are subject to varying degrees of manager discretion.

The changes are sched-uled to be implemented on July 1 for sectors A, B and C. The proposed date for the introduction of the fourth sector is January 1, 2012, following a separate consultation. But in response to widespread industry criticism, an IMA spokeswoman says: “As members have come out so strongly against what we have proposed, we want to take account of their views. If they want to put forward viable alternatives, we will definitely consider those.”

The central argument behind the IMA’s decision is that the labels will encourage more due diligence among investors to understand the nature of the funds that fall into the underlying sectors.

Fidelity managing director Gary Shaughnessy says the IMA’s approach is “patronising”. He says: “Advisers do look at what is in the fund.

hat this is doing is making that process more difficult. We need clear, straightforward labels and are encouraging the IMA to reconsider.”

Legal & General head of unit trusts Simon Ellis says: “A label is meant to describe the economic effect of the investment approach. It is challenging to describe that in three words but having labels that show the volatility of assets, as in the ABI’s definitions, is much better than just saying managed A, B, C or D.”

Skandia head of proposition Graham Bentley says: “We will lobby the IMA for sector definitions that rank volatility. That will go a long way to helping advisers identify what is inside the funds.

“With Ucits IV coming in July, all new and existing funds will have to have a key investor information document in their market-ing material that rates a fund’s volatility on a scale of one to seven. The IMA should adopt the same system for classification in the managed sector.”

IMA chief executive Richard Saunders says labels based on investment objectives is problematic, since there is an absence of a benchmark, such as a market index.

But Bentley says: “Benchmarks make managers happy, not investors. Investors are more worried about losses than returns. It should be about volatility objectives, not performance.”

Architas chief invest-ment officer Caspar Rock says the flexibility in the IMA’s descriptions in terms of funds’ holdings allows managers to protect inv-estor interests but limits consistency in definitions.

He says: “There is a clear top and bottom of the range in the managed sector. In theory, a managed B fund could look like a managed D fund as there is no limit to equities. Labelling funds according to their percentage in shares, like the ABI’s labels, makes funds more comparable.”