IMA Managed sector overhaul – the verdict

IMA’s new definitions for Managed sectors are met with cautious approval, although some fund groups say more clarification is needed

After years of industry criticism the IMA has finally decided on the future of the Managed sectors, which house funds totalling £90bn in AUM.

Investment Week revealed last week the Cautious, Balanced and Active Managed sectors will be renamed on 1 January 2012 and split into four groupings, aligning them with the ABI sectors (see table on next page).

Although not included as part of the headline definition, the IMA has also said it will collect monthly risk data on each fund which will be available on the IMA’s new
consumer website.

The initial reaction from the industry has been positive, although some commentators argue further clarification is needed on the type of funds which will sit in each sector.

Shares

The ABI said its research showed customers want jargon-free names for sectors giving simple information about the limits on equity exposure.

However, some argue the emphasis on shares does little to highlight the degree of volatility within funds.

Potter, co-head of multi-manager at Thames River, said focusing on shares – which include convertibles or other funds’ exposure to shares – is not useful and the IMA needs to go further to indicate the level of risk.

“This does not help investors judge where funds are positioned.

“For example, a fund in the 0%-35% Shares sector may be judged as lower risk, but the equities could all be in small cap and the rest in high yield –quite an aggressive stance.”

Architas CIO Caspar Rock, although largely supportive of the changes, also has some concerns.

“The downside is the way the IMA has constructed it to label the most risky asset as equities. It makes no differentiation between more or less risky fixed income, which can impact volatility.”

Cautious Managed split

As pointed out by Potter, the Cautious Managed sector is effectively being split in two, with the more low risk funds pushed into the Mixed Investment 0%-35% Shares category. But will this sector be large enough to be comparable?

“A move to withdraw more defensive funds from the main Cautious Managed sector is a good thing. It puts the funds in each sector on a more even playing field.

“But it looks like the vast majority will remain in the main Cautious Managed sector, or Mixed Investment 20%-60% Shares,” Potter said.

“I do not think there will be many moving across to 0%-35% Shares as they will want to retain flexibility. It might end up like the UK Equity and Bond Income sector with just a handful of funds in it.”

However, absolute return portfolios could boost the number of funds in the category. The IMA is still carrying out a review of the Absolute Return sector, due to be completed next year.

But Ryan Hughes, senior portfolio manager across Skandia’s multi-manager range, said he expects funds which have not delivered an absolute return and are relatively low risk could end up in the 0%-35% Shares sector.

However, Jane Lowe, director of markets at the IMA, said Absolute Return funds would not fit in this category because they use instruments such as derivatives, and IMA members have previously said they do not want any crossover between Cautious Managed and Absolute Return.

Flexible Investment

Meanwhile, funds in the Flexible Investment sector will have no constraints on equities, fixed income or cash. Lowe said the sector will be almost identical to Active Managed, with no 10% minimum in non-UK equities.

But this raises the question of whether the funds are really comparable given they can vary so widely in asset allocation, a criticism often levelled at the Specialist sector. 

Hughes said there are still question marks over the Flexible Investment sector, as the funds can have different equity weightings and risk levels.

“Investors should recognise that any snapshot in time of a fund needs to be taken with a pinch of salt. We also question whether funds will want to appear in that sector in order to be compared favourably.”

Lowe said the name was chosen to make it clear the sector is different from the other multi-asset peer groups as funds are unconstrained and managers have greater flexibility. This should encourage investors to carry out their own research on particular funds, she added.

Name changes

The IMA said the changes to sectors may result in groups modifying fund names.
Lowe said: “Some funds use the ‘cautious’ tag in their titles and we are expecting them to consider if this is still appropriate. Whether it leads to a name change is up to the fund houses.”

Cazenove, Architas, Thames River and Henderson have told Investment Week they will review their fund ranges over the coming months in light of the IMA announcement.