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Defining moment

For those of you who have been eagerly awaiting the outcome of the review of the IMA’s fixed-income sectors, the wait is over.

Last November, conscious of dynamic changes in the fixed-income fund market, the IMA performance category review committee began consulting with members on whether the fixed-income sectors remained relevant. The sectors in question were UK gilts, UK index-linked gilts, UK corporate bond, UK other bond and global bonds.

The main issues to address were whether the sectors were still relevant in light of changes in the fund market for fixed-interest products, what new names and descriptions would be appropriate and whether members would be in favour of aligning with the Association of British Insurers’ recently reviewed fixed-income sectors and/or the European classification system.

It was agreed to adopt revised definitions for all sectors, apart from global bonds, and bring them closer to ABI definitions. This involved splitting the UK corporate bond and UK other bond sectors into corporate bond, strategic bond and high-yield sectors.

It has also been decided that in line with other sectors, the IMA will not specify the assets that can be used in the non-core part of the fund. However, the IMA has issued guidance reminding managers to ensure their strategy is transparent to the customer, relevant to the fund’s objective and takes account of treating customers fairly. The new definitions are:

UK giltsFunds which invest at least 95 per cent of their assets in sterling-denominated (or hedged back to sterling) AAA-rated government-backed securities, with at least 80 per cent invested in UK Government securities (gilts).

UK index-linked giltsFunds which invest at least 95 per cent of their assets in sterling-denominated (or hedged back to sterling) AAA-rated government-backed index-linked securities, with at least 80 per cent invested in UK index-linked gilts.

Corporate bondFunds which invest at least 80 per cent of their assets in sterling-denominated (or hedged back to sterling) BBB-minus or above corporate bond securities (as measured by Standard & Poor’s or equivalent external rating agency). This excludes convertibles, preference shares and permanent interest-bearing shares.

Strategic bondFunds which invest at least 80 per cent of their assets in sterling-denominated (or hedged back to sterling) fixed-interest securities. This includes convertibles, preference shares and Pibs. At any time, the asset allocation of these funds could theoretically place the fund in one of the other fixed-interest sectors. The funds will remain in this sector on these occasions since it is the manager’s stated intention to retain the right to invest across the sterling fixed-interest credit risk spectrum.

High yieldFunds which invest at least 80 per cent of their assets in sterling-denominated (or hedged back to sterling) fixed-interest securities and at least 50 per cent of their assets in below BBB-minus fixed-interest securities (as measured by S&P or equivalent external rating agency), including convertibles, preference shares and Pibs.

The timetable for implementation is September 1. Members have until December 31to comply with the revised definitions and the track records of funds will be retained.

Mona Patel is head of communications at the Investment Management Association

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