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Sectors’ house needs clean-up

With talk of the Investment Management Association creating new sectors to house the latest trend of total return funds comes the inevitable criticism of existing sectors and the funds listed within them.

The biggest target of all in this never ending debate is the make-up of the large UK All Companies sector, which features a broad sector definition of listing funds that invest more than 80 per cent in UK equities.

As a result of this broad criteria, the UK All Companies sector now has a peer group of just under 350 – up from the 290 funds which feature track records of three years.

Within this diverse universe of funds sits a myriad of portfolios with different objectives, the long pointed out anomaly being that ethical and tracker funds sit in this peer group.

But it is not just ethical and index funds that stand out as being different within the UK All Companies’ grouping. The list of fund names reflects the marketing trends of the past few years as well as product developments and, if one were to sort this sector by fund name alone, it would be possible to come up with more than 10 distinct groupings with substantial participants in each. It has often been said that a sector grouping of fewer than 11 names is unviable.

For instance, growth and income funds exist within UK All Companies and, based on name alone, not including what may or may not be the underlying objective of the fund, there are a dozen such vehicles.

There are around 50 portfolios that go by the name select opportunities or special situations, funds which are supposed to be a type of go anywhere fund, with multi-cap mandates, Although even within this group there are obvious differences, with some managers using a value bias while others are distinctly growth in nature.

More recently, there are the obvious trends of mid cap, of which there are under 10 dedicated funds within UK All Companies designated by that fund name, and alpha portfolios, to which there are under 20 using that monicker.

Arguments can rage over whether or not these portfolios have enough features in common to all be within the same peer group – after all, whether they are called focus, alpha, special sits or select opps, their mandates are relatively similar – to invest in UK equities.

But there are others still where this argument looks more than a little weak. For one, there are a number of multi-manager port-folios within the UK All Companies sector – some fund of fund structures, while others use a segre-gated mandate basis, splitting up portions for various fund managers to run using different styles.

In addition, there are several portfolios that many would consider better placed in, say, the specialist sector.

Not only is there more than 20 portfolios with ethical mandates, of varying shades of green, there are now also environmental funds listed in the UK All Companies sector.

So why does a natural resources fund sit in the specialist sector alongside funds such as Baring Korea or New Star Financials, while an environmental fund sits with mainstream UK equity portfolios?

The obvious name difference should be, in some effect, a signpost for investors looking at this sector but there are quite a few abstract names that make even this difficult as a form of segregation.

Look at the sector these days and you will find names such as: S&W Skye Trust, Thornill Alligator, Unicorn Free Spirit, Threadneedle Accelerando, ACDS Analyst, Allchurches Amity and CF Real Life.

And just how can the average investor tell the difference between funds described as dynamic, alpha, select, recovery, best ideas, advantage, concentrated, unconstrained, freestyle, value, targeted return, diversified, focus, blend, aggressive, general and strategic?

You would find few who could argue that the UK All Companies sector is a mishmash but it could be argued that worse still is the UK Other Bond sector. This sector of 55 vehicles may currently be a confused peer group of funds with global exposures, those investing in government securities, funds invested solely in junk or high-yield issues and those with a mix of corporate bonds and equities but it is also likely to be cleaned up in some degree with the creation of a total return sector.

The UK Other Bond sector has been the most natural home for the many new breed portfolios with cash plus or go anywhere mandates.

Within the 55-strong sector, there are 13 portfolios that use the name total return, dynamic or strategic to describe their investment function.

If the IMA does get total return sectors off the ground with some amount of industry agreement, it might help to clean up some sector groupings but the biggest issue remains – how and why should the funds listed in the UK All Companies continue to be defined?

And if product development and marketing trends continue the way they have been going, just how much more convoluted will it become?


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