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S&P fund sector split divides the industry

As one of the UK&#39s foremost financial trade bodies, the Investment Management Association rarely becomes emb-roiled in public disputes with commercial organisations but Standard & Poor&#39s decision to ditch the IMA&#39s sector classifications on some products in favour of its own has prompted the association to cast aside its usual reticence.

S&P, which is already under fire for the way in which it awards its fund stars, is introducing its own global investment fund sectors covering funds domiciled domestically and outside the UK.

It says it is bringing its UK business into line with the rest of Europe and catering to a growing need for a single database for international products.

But the IMA is irked by the fact that S&P&#39s website and its popular Fund Expert broker tool will not offer its classifications at all.

Only the Workstation product which provides access to fund performance and information and Fund Insight will offer the choice between IMA and S&P classifications.

IMA head of statistics Dorian Caroll says: “We do not think they are promoting both equally. We would like to be available on all platforms. The intermediary channel is such a major source of sales that this is a major problem.”

S&P says Workstation and Fund Insight users will see a screen offering both options butit admits it has branded its own classifications as First Tier and the IMA&#39s as Second Tier.

According to the IMA, this is not simply a question of unfair marketing but also one of investor confusion and, to some extent, represents a betrayal of its performance category review committee. The committee, which includes S&P, decides on what sectors to open or close and, crucially, monitors the portfolios of every fund in each sector to ensure that it remains within its constraints.

The most recent example of its power was when it warned Odey Asset Management that its Continental European fund faced expulsion from the Europe (ex UK) sector because it was less than 80 per cent invested in equities. Although the investment policy shot the fund to the top of the performance tables, Odey backed down, fearing the loss of the fund&#39s track record.

By inventing a whole new suite of sectors, which it believes will not be monitored monthly, the IMA says S&P is failing to support the committee&#39s efforts to ensure that investors have funds that remain within their remits.

The IMA also doubts whether S&P can rein in err-ant fund managers.

A further problem, according to Caroll, is that S&P&#39s sectors will be sub-divided. For example, its equity UK sector – S&P&#39s equivalent of the IMA&#39s all companies sector – will have ethical and ecology sub-divisions. S&P says this will ensure clarity and allow inv-estors to compare funds on a like-for-like basis.

But Caroll believes it is a fundamental flaw in the system which will baffle investors. He says: “These sectors are designed to help people analyse funds in minute detail but most people do not want to. We try to have the least number of them possible. We think sub-sectors are a weakness.”

For IFAs, whether S&P&#39s move is good or bad depends on the size and budget of the firm. Bates Investment Services head of investments James Dalby believes that for bigger firms which can afford the pricey Workstation product, the option of using either IMA or S&P classifications is a real boon. But he doubts whether smaller IFAs with minimal budgets will welcome the change.

He says: “Lower down the scale, firms have no ability to buy Workstation so it will be a problem for them as Fund Expert will not feature the IMA classifications. It undoes a lot of the work that the IMA has put in.”

In fact, the real beneficiaries of the move are the IMA members themselves, many of which offer offshore-domiciled funds currently languishing on the periphery of most IFAs&#39 radar screens.

Andreas Lehman, managing director of JO Hambro Capital Management, which has a single Dublin-domiciled Oeic which houses its funds, says the move is practical and could expand its client base. But he admits that any such system is flawed, even disregarding the difficulties inherent in comparing domestic and non-domestic sectors.

He says: “One has got to be wary of these statistics. There are a lot of apples and pears in there. Anyone who is even half-professional should take them with a pinch of salt and use them only as an initial screening device.”

The ultimate winner, of course, could be S&P which, due to the increased number of funds it will be classifying, which may be able to charge more for its services as it provides greater coverage but it denies that profit is a motive.

UK media manager Louise Collins says: “This should aid clarity to allow investors to see what funds they want to buy. There will be alteration to the charging structure but we are not doing it for that reason.”

Although it could be said that the IMA is unhappy with the move because it marginalises its classifications, its argument that having two very different sector suites will be confusing to investors is hard to dismiss.

Big IFAs will benefit from having more choice but smaller players with more basic products will have to adjust to a new system, whether they want to or not. S&P&#39s intentions may be honourable but its decision and method of implementation are certain to draw further criticism from more than the higher echelons of the IMA.


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