Time and time again, I find myself return ing to the thorny topic of IMA sectors – and not because we find them so but because the trade and national press (including this esteemed publication) are so exercised about them. They, in turn, are partly fuelled by the strident views of IFAs, of course.
This time, the thorn causing all the excitement is the absolute return sector. A flurry of articles in the press criticised the sector and at the same time the IMA sector review has been looking at the entire classification scheme to see whether it still does the job it set out to do. And guess what? For the most part, it does. Where it does not, it is because funds can now use more varied techniques and financial instruments and many new funds are focusing on investment strategy rather than asset type. These two things were bound to pose challenges to the classification system at some point.
Maybe it is worth reminding ourselves why the sector classification scheme exists. It is primarily there to be of benefit to the end consumer who wants and should be able to compare similar funds. So the main purpose of our scheme is to group together similar funds whose performance can be readily compared by consumers and their advisers.
Back to the absolute return sector. All the funds in the IMA sector are bound by two things, first, they aim to produce a return of more than zero and, second, they aim to do so within rolling periods of 12 months, whatever the market cycle is. Admittedly, there is little detail in the definition. It does not, for instance, take assets into consider-ation and this is the cornerstone of the majority of IMA sectors. The lightness of detail is why the sector definition has two main caveats. First, performance comparisons are inappropriate due to the diverse range of funds in the sector. Second, there is no asset-based monitoring of funds within the sector. And this must be right, given that a closer look at the funds in the sector shows how diverse they are in terms of assets, benchmarks and risk.
Some might argue that not to be able to compare performance goes against the grain of having a sector. But it is still possible to compare funds in the sector using other criteria, such as performance against the sector aim and by charges levied.
Now that the sector has been up and running for long enough, we do aim to find a better place for it to sit. Owing to the amount of discretion managers of absolute return funds have, one option may be to group the sector with the managed sectors. Another option might be to develop a group of alternative sectors which are more outcome-focused, such as the absolute return sector, and not based on asset type.
We hope to work with IFAs to gauge their views as big users of the sectors. We very much hope there will be interest in helping us as the IFAs are a rich source of information on consumers’ needs.
The name of the sector is one of those things about which much is also written and it might be something for us to look at once we have a clearer idea about where the sector should sit. All suggestions are welcome.
Mona Patel is head of communications at the Investment Management Association