Demonstrating its importance, the Investment Management Association has issued revised guidelines for what constitutes a sector breach. The revision sets out the procedure for how a fund will be dealt with if found to be in breach of their sector criteria.
The updated definition states a fund is in breach if it has not met its full sector criteria for three consecutive months or five months out of 12 in a 12-month rolling period. The fund risks being removed from its sector and placed in either the unclassified sector or a sector designated by the Performance Category Review Committee (PCRC). It will not be able to return to its original sector for at least 12 months.
The statement appears to be a warning shot for the industry to show that the IMA is going to clamp down on funds breaching investment mandates to increase their performance relative to their peer group.
The importance of effective oversight has been emphasised by investors moving into cautious managed funds. According to IMA monthly statistics, May saw 262m gross inflows into funds listed in the IMA Cautious managed sector. This compares with only 122m gross inflows into balanced managed funds and a paltry 45m into active managed.
In the current climate, any move to reassure investors is likely to be met favourably by the industry, says James Davies, investment research manager at Chartwell Investment Management. “If you ask advisers there are two major grumbles with the IMA sectors,” he says. “Some funds in the cautious managed sector can have up to 60 per cent of the fund in equities which, as far as I am concerned, is not cautious. Also, funds in the UK Equity Income sector can sometimes have yields lower than the FTSE All Share average.”
Sam Sibley, investment manager at Beckett Financial Services, says there is enough talent in the industry for managers not to have to exceed their criteria. “The problem at the moment is that some managers might inadvertently breach their cash level criteria to express their bearish view,” she says.
One of the main problems facing advisers, says Davies, is that current disclosure practices are not sufficient to offer advisers the level of transparency that they would like.
“As far as I know there isn’t a standard way of getting access to portfolio holdings,” he says. “Firms are often reluctant to release information on holdings in their funds, particularly if they know you are active in the market.”
Investors and advisers alike need to be confident that the IMA has both the access and the facilities to efficiently monitor its members to ensure that funds in the same sector are held to the same standards.
The performance of the three benchmark AFI indices shows the value of separate mandates. The last 12 months have proved a difficult time for the industry with the Aggressive portfolio shedding 13 per cent and the Balanced portfolio losing 11.9 per cent. The Cautious managed portfolio, however, lost only 9.5 per cent over the same period as its defensive position cushioned it from tracking the full impact of falls in the FTSE.