Rathbones and Fidelity suggest alternatives to Managed sector labels

Leading fund groups suggest a focus on risk assets in Managed sectors after IMA review causes furore.

Rathbones and Fidelity are suggesting a focus on risk assessment to categorise funds in the Managed sectors as an alternative to the IMA’s alphabetical labels which were criticised by the industry.

The groups agree by focusing on ‘risk assets’, advisers and their clients will get a clearer idea of what they are investing in, and portfolio managers will have greater flexibility in running the funds.

There suggestions come as the IMA today moved to push back the deadline to decide the fate of the Managed sectors until October when it was introduce as yet undecided changes.

Rathbones said one of the problems with the current classification for Cautious, Balanced and Active is it encourages managers to take higher equity exposure to beat the peer group.

The group takes the view investors’ time horizons should be included in the definition of the Managed sectors.

Mike Webb, chief executive of Rathbone Unit Trust Management, said: “We believe any significant reorganisation of the sectors must look at the ‘risk side’ of the equation when determining what funds should be placed in which sectors.

“Funds should be categorised by the risk they are taking relative to equities, rather than by their equity exposure per se, and each sector should have an ideal time horizon to which an investor should be willing to commit money, especially if there is an extreme market event.”

The IMA had given its members and the industry until this Friday to make suggestions on how to classify the Managed sectors, which at present are attracting £1 in every £8 invested in funds. It has now extended that deadline until the end of July.

Webb said there should be a clear description at the sector level about the nature of the funds contained within them, and how each sector relates to the others, so the hierarchy of risk between sectors is clear.

Any funds not being run in this manner should be placed in a ‘specialist’ sector where sector comparisons would be banned, as is currently the case for the Unclassified sector.

Webb added: “Adopting this methodology would more clearly align the Managed fund sectors with the need of the IFA to assess the risk-return profile of their clients.

“Clearly, further work would be needed in order to refine this approach, but it is evident the IMA recommendations fall short of what both the industry and investors require.”

Gary Shaughnessy, UK managing director at Fidelity International, said: “We agree with the IMA that descriptive names such as the existing ones do imply value judgments and will differ for each individual. But we disagree with the notion you cannot convey the flexibility of these funds in a name, or names based on asset allocation limits would be unwieldy. Content-oriented names similar to the ABI categories would be better.”

However, he added, the main criticism of the ABI names is that by stating the equity content, it implies this is the only risk element in the fund, Fidelity wants the IMA to focus on the amount the fund can invest in total in ‘risk assets’.

“I hope the industry makes the most of this opportunity. Once this has been done, I think it would then be pertinent for the IMA to gauge the views of the people who really matter – investors and their financial advisers.”