4th March 2013
Should you worry about the name and the category or ‘classification’ of the fund you are investing in? The answer could be yes, certainly if you are relying on the name to help you identify whether a fund meets your investment needs, or indeed if it comes close to matching your attitude to risk.
Due to concerns about this, the Investment Management Association is changing one sector classification, which could have significant implications for you.
The absolute return fund sector is changing to the targeted absolute return sector. This reads like a small change, but it carries a significant ambition. The intention is to guard against any possible false belief among investors that absolute return funds carry some element of guarantee.
It is also adjusting the criteria for the sector. Up till now, funds in the sector have been expected to post positive returns in all market conditions over a year and not all have done so up until now. This period will now be extended to a maximum of three years, though the trade body will publish data showing which funds have consistently managed to outperform over rolling one year periods.
The trade body is also promising more filters on its website that will theoretically allow consumers and their financial advisers to better identify different types of funds that are using different approaches under the new targeted absolute return umbrella. The full announcement is here.
There has been quite a bit of controversy around the move. Ft.com reports on some opposition among investment intermediaries to the name change, not because they are against the change per se, but because they do not feel it actually makes things more easily understood.
Some have criticised the failure to break the sector up into more easily understood categories suggesting that the range of investment strategies deployed by this type of fund are too diverse or that three years is too long.
All of this may seem a little bit like a storm in a trade body teacup. But it illustrates something that the fund industry has been wrestling with for many years. It took the IMA two years of debate to come up with this name change. But trade bodies, fund managers and insurers have also been under huge pressure from regulators and consumer groups because, at times, consumers have bought funds that have not done exactly what they said on the tin. Some of this has been blamed on the labels on the funds or on the sector classifications.
One can see how this can happen with for example funds labelled cautious when they then adopt a much more risky investment strategy.
And yet it may not simply be as easy as sorting out the names. For example a fund consisting of largely of investments in gilts i.e. UK Government bonds would carry very little risk of investors losing all of their capital. It might however carry a risk of very low returns in the current investment climate which given inflation could mean losses. It is very difficult to see how you encapsulate that in a label attached to either fund or category of fund.
A fund could fail to follow the rules of its category, and the IMA always has the ability to throw funds out of a sector, though it has rarely done so. It has, for example, made repeated threats to income funds over whether they are meeting their minimum target yield as reported in trade website Investment Week.
It many ways the absolute return sector is even more difficult to sum up. It involves a very interesting strategy or family of strategies that had for the most part been denied to retail investors, until relatively recently.
Some funds in the sector have attracted huge amounts of investors’ cash. The Standard Life Global Absolute Targeted Return fund for example has more than £15bn invested and has posted excellent results.
The funds also have the appeal, at least theoretically, of not following markets through their highs and lows, though that is not necessarily a bad thing if your goals are long term.
On balance, we think the IMA should be applauded for trying to achieve better understanding of what its sectors and classifications mean even if it has taken a long time.
But what if you are a investor? Mindful Money has a few thoughts. First, we think you should pay heed to what a fund is called, and what sector classification it is in, particularly if that sector classification helps determine the objectives and strategy of the fund, at least in part . But if you are individual DIY investor it is really best to understand exactly what the fund is trying to achieve and what level of risk it is taking almost without reference to the label.
If something sounds like it might be safe or guaranteed, it doesn’t mean it is, unless it is specified in the literature. If you are talking to an adviser about investing in a fund or portfolio make sure he or she actually talks you through the risks and the objectives of the fund or funds involved regardless of the label. In a decent advised process, this should not be a problem.