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Ringing the changes

The clamour for sector changes seems to have reached a crescendo recently, with lots of suggestions fired in the IMA’s direction.

These include calls for definition changes, new sectors and wholesale reviews. But it is at times like this that we need the certainty of sectors and their definitions.

We should probably accept as inevitable that there will always be someone somewhere calling for a review of one or other of the sectors given the number of funds we are dealing with – more than 2,200 UK domiciled funds at the last count. But the clamouring voices also need to accept that if we took on board every single request for change we would have funds moving sectors every five minutes, losing performance records and with that the certainty that we offer to investors and advisers at the moment.

Sectors exist to help investors find the best funds to meet their own investment objectives. As a first step, funds are split according to whether they provide income or capital growth. This distinction is not absolute – some investors will select an income fund but choose to reinvest that income as a means of achieving capital growth.

The sectors are also designed to keep funds with similar investment objectives or asset allocation together. And we all know that the investment universe does not stand still. The market is constantly evolving as fund managers innovate and investment preferences and demands change.

These need to be reflected within the classification system but at the same time we cannot accommodate every single fad and innovation.

How do we decide what we can and cannot accomm-odate? The IMA has a performance category review committee made up of a crosssection of IMA member firms and supported by IMA staff acting as secretariat to the committee. The committee also has representatives from the major fund data suppliers. The members themselves are drawn from a range of functions including operations, marketing and investment management. This mix of firms and disciplines ensures balance.

The committee oversees monitoring of sectors to ensure that funds comply with their sector definitions. This is based on portfolio holding information and where appropriate, other data such as income, which is monitored by a third party. Breaches are then dealt with by the IMA.

It all may sound simple but when it comes to the detail it gets more compli-cated. If anyone can come up with a better system that is easy to administer and understand we would whole-heartedly welcome it.

Mona Patel is head of communications at the Investment Management Association


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