Ucits III forces IMA to rethink classifications

The IMA is considering overhauling its sector classifications to account for greater use of synthetic investments since the arrival of Ucits III powers.

It says while sectors have traditionally been defined by a minimum exposure to an asset class, such classifications have become less relevant since the introduction of broader investment powers under Ucits III. These powers allow the fund manager to meet the definitions without holding physical assets or by using an overlay strategy.

The issue has been compounded by the growing popularity of absolute return and multi-asset funds, which make more use of alternative assets such as hedge funds, private equity, commodities and structured products, the IMA says.

The association is now surveying members on whether it should continue to accommodate both traditional funds owning physical assets in the same sectors as those gaining exposure through synthetics.

It says possible solutions include the creation of new or parallel sectors, flagging, risk-based classification or a request for greater transparency on holdings.

The IMA says monitoring the make-up of fund assets has become increasingly difficult since the introduction of Ucits III, and it could introduce a mandatory sign-off from an officer of the company confirming the net exposure of the fund once or twice a year.

“Increasingly, it is not sufficient to provide just portfolio holdings information to Lipper at month end, but also additional conformation of the net exposure of the fund, in particular where funds use derivatives,” the IMA says.

“Simplistically, if the sectors remain as they are, more information will be required to monitor non asset-based funds. If the sectors scheme changes, portfolio holdings alone will be insufficient to make an assessment of compliance, and some form of self-certification may be required.”