IMA urged to adopt European AR rules

LGIM’s Ellis believes adopting European rules will help rectify any ambiguity regarding sector.

Legal & General Investment Management’s Simon Ellis has called on the IMA to adopt European guidelines when it overhauls the much-maligned Absolute Return sector.

Ellis, the head of the group’s unit trust business, said the current IMA sector definition does not set expectations in terms of constituent funds’ underlying investments. He added the return expectations are also ‘implicit’ as opposed to being set in stone.

He said the IMA should adopt the European Fund and Asset Management Association (EFAMA)’s definitions to better manage client expectations, removing the five accompanying footnotes which are attached to the current definition.

“The main issue with the sector is the definition is ambiguous and misleading,” said Ellis.

“Investors are left with this horrible piece of non-literature which suggests the funds will not lose money and you will probably get more than leaving your money in cash.

“The IMA should adopt the EFAMA definition, which is funds ‘managed with the objective of generating a positive return over a cash benchmark, irrespective of market movements, making use of derivatives to short/long securities or the market as a whole’.

“This is much clearer as it helps the customer and adviser understand what they should be expecting from funds in that sector. The EFAMA also helps managers in the design stage of the funds and ensures they are playing against the peer group.”

He added the only other alternative would be to dissolve the sector and place all the funds into either the Unclassified or Specialist sectors.

Ellis’ view investors are being misled by the present definition is supported by Henderson’s Jon Hodesdon, the group’s associate director of multi-manager accounts.

Speaking last month at the Thames River Multi-Manager Forum Academy, Hodesdon said the footnotes are misleading: “I do not believe the IMA has got an exact, clear definition of what funds in this sector are trying to achieve.”

A spokesperson for the IMA said the label ‘absolute return’ and definition are topics for discussion in its annual review of the sector. It hopes to report back before the end of the year.