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Monitoring moments

“Past performance is no guide to the future” is the familiar mantra that has been the subject of much debate over the years. Whatever the theory, the reality is that consumers and industry professionals alike view performance statistics with a high degree of interest.

The varied options for the presentation of performance data can make comparison of funds a minefield for the uninitiated. There is a tension between marketers, compliance departments and regulators about how information is presented. This is an area receiving much scrutiny from the FSA, both in terms of how performance is presented in advertisements but also in the literature that clients receive.

The new key facts regime which is due to replace the key features regime for funds from February next year is subject to delay because of difficulty in getting agreement at an EU level about its contents. One of the key topics is the inclusion of past performance information. The discussions centre on how it should be presented. It seems likely performance will be shown in two ways:

•A line graph showing cumulative returns on a £1,000 investment

•A bar chart showing percentage returns on a discrete annual basis.

This information will be of interest to investors but the key area of focus for industry professionals, as well as more sophisticated clients, is the area of performance relative to peer group. In this regard the Investment Management Association&#39s sector definitions are of paramount importance.

The sectors subdivide UK domiciled funds into categories which allow easy comparison of funds with similar investment objectives. A list of sector definitions is available on the IMA website ( The system is currently being strengthened with the introduction of a formalised system of sector monitoring.

The new process involves Lipper, on behalf of the IMA, collecting and analysing portfolio data for all UK domiciled funds. Monthly reports show sector by sector which funds are not invested in accordance with the sector definition.

If a fund is not invested within the parameters of its sector, IMA writes to the fund manager and gives them the opportunity to bring the fund back into line with the sector definition. Alternatively, the manager can continue investing as before with the fund classified in a more appropriate sector.

A small number of fund groups have been unhappy with this approach, saying that IMA is forcing them to change the way they run the money. They have completely missed the point – IMA is in no way trying to determine how portfolios are managed, it is simply trying to ensure that funds are classified in the most appropriate sector to minimise investor misunderstanding.

Fund groups can opt out of the sector monitoring process, either for their whole range or for specific funds. The funds concerned will be categorised as unclassified – as such, they will not be included in the mainstream sectors.

Being unclassified does not imply any problem with a fund – there are perfectly innocent reasons why a fund might be so categorised. For instance, institutional funds or funds not publicly marketed may have no need or desire to be compared categorised in what have essentially been retail-driven sectors. By opting out, a fund house and associated clients are simply prevented from analysing their performance relative to a particular sector. They can, however, still show performance relative to the specific benchmark.

This new system is still in its early days but it should be seen as a hugely beneficial move for the industry. Potentially more changes are afoot with the news that one of the data providers plans to promote their database which allows comparison of all funds registered for sale in the UK.

This includes all UK domiciled funds and funds domiciled in other jurisdictions (such as Ireland and Luxemburg) which have been registered for sale in the UK by the FSA. The inclusion of offshore funds registered for sale in the UK will almost double the number of funds to around 4,000.

The availability of this analysis is not new, but to date it has not been widely promoted. Offshore funds registered for sale in the UK will be subject to broadly equivalent regulation to a UK fund but advisers should consider other factors.

There may be tax and currency issues as well as an absence of sector monitoring in relation to offshore funds. This does not mean advisers should not consider offshore funds – they simply need to be aware of them when doing their research.


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