Advisers and providers are unsure what shape the fourth managed sector D should take and whether it should include a number of absolute return funds.
The introduction of the fourth sector later this year is part of the IMA’s decision to rename the active, balanced and cautious sectors as managed A, B and C, a move that has received a largely negative response from the industry over its vagueness in description.
The IMA says it aims to indicate that as the funds are managed, they are more subject to manager discretion.
The D category will effectively be a continuation of the existing sectors and the IMA says it will have a potential maximum equity exposure of 35 per cent, whereas cautious managed funds currently have a maximum exposure of 60 per cent.
A consultation on the sector, which is being carried out separately to the one on absolute returns, will also look at whether some cautious managed and absolute return funds should be included in the category.
IMA chief executive Richard Saunders says the sectors are “the best answer” for the industry. He says: “We suspect a number of funds that currently sit in the absolute return sector will migrate to the managed D sector when it comes in.”
The IMA is trying to create almost a complete cover for managed funds, ranging from 100 per cent in equities in the active sector all the way down to absolute return offerings.
Hargreaves Lansdown investment manager Ben Yearsley believes the managed D category will not help investors understand the products within it.
He says: “The question is whether it will benefit the client and the answer is probably no. Yes, there are sectors like UK all companies and absolute return that have a vast array of different funds and you could make a case for 20 new sectors but that benefits no one.”
Yearsley says the likes of Newton real return, managed by Iain Stewart, and Artemis strategic assets, managed by William Littlewood, are types of products that may end up in the new sector, given their consistent performance and attributes.
M&G head of global sales Jonathan Willcocks says he would like the IMA to ban absolute return funds from the new sector.
He says: “I applaud the creation of the defensive sector but I oppose any suggestion that absolute return funds be merged in this new sector. Absolute return is a poorly defined term and is potentially misleading.”
Skerritt Consultants head of investments Andy Merricks says the introduction of the new sector is as ridiculous as renaming them A, B and C.
He says: “No one will understand what the new sector will look like as it will be under the same confusing banner as the others.
“Adding absolute return funds into it will only muddy the waters in terms of what absolute return products are and where they sit. The big worry is it becomes another sector with a whole mixture of products that do different things.”
Martin Currie head of product development Toby Hogbin is a fan of the new sector but warns it must be an addition to the existing managed sectors rather than an offshoot of absolute return funds.
He says: “We are seeing the development of a raft of Ucits strategies since the introduction of Ucits III so a sector like this does make sense in developing the multi-asset and absolute return market and giving investors clearer guidelines.”
Some are calling for a number of cautious managed funds to sit in the new sector. The average three-year return for a cautious managed fund is 11 per cent and while some are up by more than 20 per cent, others such as the JPM cautious total return fund is fourth quartile in the sector despite producing a positive return of 3.1 per cent over three years.
Bestinvest senior investment analyst Adrian Lowcock says the main issue is clarifying exactly what risks the funds are able to take and how these are going to be assessed and monitored.
He says: “A very cautious sector is likely to attract investors who do not want risk and are comfortable with low levels of growth and are therefore potentially vulnerable to being missold an investment because the sector definitions do not address risk correctly.
“The sector should not be used to badge up poor-performing cautious managed or even balanced managed funds along with absolute return funds as this will create risk that advisers or investors select inappropriate funds for their objectives.
“The absolute return market is still developing so we might not see problems in this area for some time. Should they really be called low risk until they have been proven to be so?”