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Why IMA opted not to split

Following a review of the UK All Companies sector, the Investment Management Association has decided not to split the sector.

There is insufficient argument for splitting the sector as many of the proposals contained as many flaws as the critics argue the existing classification suffers from.

Money Marketing often features stories about the unwieldiness of the sector and calls for change and sub-categorisation but our decision against change got little coverage.

Why did we decide against change? Unlike many schemes, IMA members choose where they want their funds to be listed on the basis of the FSA’s fair and not misleading principles. The IMA’s performance category review committee, made up of member firms, monitors the sectors to ensure funds remain in line with their sector requirements. The UK All Companies sector contains 329 funds investing at least 80 per cent in UK equities. Being the home market, the popularity of the sector is not surprising. Within it, there are 39 index trackers, 19 ethical funds and 10 funds of funds.

The imperfections of the current system were acknowledged, but none of the alternative proposals was better.

Among the ideas put forward were sub-division by market capitalisation/ style, tracker/ethical, focused funds and funds of funds.

In relation to market capitalisation there is already a UK smaller companies sector. A large proportion of funds will view allocation between large, mid and small-cap companies as a key source of added value and would be likely to shun sub-sectors in favour of remaining in a general sector and able to exploit returns which accrue to different size companies.

This is equally true for sub-division by style. In the case of growth and value funds, it would be difficult to monitor how well they were sticking to their style as many managers want to manage investments actively, swinging between growth and value.

Sectors based on capitalisation and style may create the problem of funds moving between sectors and the attendant issues surrounding restrictions on taking performance track records to another sector.

Another request has been to separate tracker funds and ethical funds. Taking out 39 tracker funds and 19 ethical funds from a universe of 329 will hardly reduce the number of funds. Tracker and ethical funds are flagged up across all sectors and can be easily identified.

A further suggestion was to separate focused funds. This is based on equating risk with portfolio concentration.Concentration can lead to higher active risk but other elements, such as high small-cap exposure, can have a similar effect.

Finally, as funds of funds have increased in popularity, questions have arisen about a separate sector. It was felt there would be insufficient funds willing to move from a general sector into one favouring funds of funds. There are currently 10 flagged funds of funds in the UK All Companies sector and funds of funds, such as ethical and tracker funds, are clearly flagged across all sectors and are easy to identify.

So we are of the conclusion that the only sensible decision is not to split the sector.

Mona Patel, IMA’s view

Mona Patel is head of communications at the Investment Management Association


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