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Michael Johnson: Stop IMA labelling fund sectors

The Centre for Policy Studies is finalising a major peer reviewed report which will call on the Investment Management Association to stop labelling fund sectors and for the powers to be passed to an independent body.

The report is expected to be published in June and its author, CPS research fellow Michael Johnson says it will make around 100 recommendations on how to put savers at the centre of the industry’s approach.

Speaking to Money Marketing, Johnson adds that by labelling Arch cru funds as cautious managed the IMA “unwittingly facilitated” misleading claims about the funds’ risk.

The IMA has now moved to a system where its managed fund sectors are defined as either mixed investments 0-35 per cent shares, mixed investments 20-60 per cent shares or mixed investments 40-85 per cent shares. Johnson says this does not go far enough.

He says: “Clearly it would help investors if funds had labels, but what is the underlying objective of the IMA’s involvement in this space? It is to promote the interests of its members and sell more funds. It does not share a common purpose with savers.

“Arch cru funds were sold by their salesmen on the basis of the cautious managed IMA label and the implication from that was the risk was low. It may well be the IMA’s intentions are completely honourable but we have now come to learn it clearly was not low risk. Therefore the IMA unwittingly facilitated what has emerged.”

Instead, Johnson suggests that labels should be applied by an independent body whose work is paid for by those who rely on them. “People have to be paid to do this and ultimately it should be paid for by the beneficiaries of the labelling – savers and investors,” he says.

An IMA spokeswoman says: “The IMA sectors are not and never have been risk ratings. The sector definitions have always been plain for all to see on our web site.”

The report is being reviewed by members of the House of Lords and people from the industry.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. “ultimately it should be paid for by the beneficiaries of the labelling, savers and investors”.

    Which savers and investors are going to pay for this? Hands up, who wants to pay?

  2. You really cannot make this sort of thing up.

    Mr Johnson’s comments in respect of CF Arch Cru have come over 5 years too late. Mr Johnson was a non executive director of Arch Financial Products LLP at the time the IMA categorised CF Arch Cru funds as Cautious Managed. As a non executive director of the fund management group he should have been fully aware of what was in CF Arch Cru Funds and the level of risk involved and if he was not happy with classification he should have shouted the fact from the rooftops.

  3. Not a horrendous idea, but the real issue will be how to implement it.

    Will this become an extra layer of charges to be paid by consumers when they invest (and one which the consumer interest bodies will come to decry as ‘rip off’)?

    Will IFAs be expected to subscribe to a more sophisticated fund analysis tool which will provide the classification and leave us open to criticism that we have chosen the wrong one and/or should not have relied on the information it provided?

    “labels should be applied by an independent body whose work is paid for by those who rely on them.”

    The implied belief that an independent body being paid to provide the classification will be unimpeachable is worrying. Has everyone forgotten how Standard & Poors and Moodys – suppossedly independent professional credit ratings agencies – willfully failed to classify Mortgage Securities correctly because it meant they continued to benefit from the gravy train?

    Perhaps the thought is the FSA should do it?

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