Charlotte Richards asks a quartet of wealth managers whether the IMA sectors are fit for purpose and what improvements the trade body should implement.
Earlier this year, Investment Week reported that leading fund managers were calling for the Investment Management Association (IMA) to make drastic changes to the way it categorises funds.
Some even went as far as saying it should no longer be responsible for sector names and definitions, and called for the trade body to appoint an impartial organisation to oversee the task.
Sectors such as the recently reviewed Mixed Investment group, Absolute Return, Specialist and £ Strategic Bond have been under particular scrutiny from managers as their broad definitions have meant there is a vast disparity among funds within each sector.
Four wealth managers on how they would re-jig the IMA sectors
But what do wealth managers – the very people who use the sectors – think about the current definitions. Do they believe a severe overhaul is necessary?
Gordon Kearney, director, Fiducia Wealth Management Limited
“The recent shakeup of the Mixed Investment sectors is a step in the right direction”
The recent shakeup of the Mixed Investment sectors is a step in the right direction to help the common investor, as the new labelling specifies the maximum equity content each fund in that sector can have; a much clearer identifier of potential risk than was previously the case. This should go some way toward aligning investors’ risk attitudes with the appropriate sector.
However, we feel there are areas which need to be made clearer. For instance, the IMA Property sector is a combination of so-called ‘bricks and mortar’ and ‘property securities’ funds, with the latter experiencing far greater levels of volatility.
Yet to the unsuspecting investor they both come under the property umbrella and should therefore essentially be similar in terms of risk. As this is of course not the case, it raises the obvious potential for a misalignment between client risk attitude and fund risk to occur, which is not a desirable outcome.
Our fund selection process applies a blend of quantitative and qualitative factors, but is flexible enough to appreciate that there is not a ‘one size fits all’ methodology to use when scrutinising the various IMA sectors.
While analysis for the traditional asset classes - such as equities and bonds – is predominantly driven by quantitative aspects to identify those funds with the best long term risk and reward profiles as well as attractive correlation characteristics, a more qualitative approach is used when investigating other sectors, such as Property and Absolute Return, to accommodate their particular characteristics.
Although some sectors are broad in their composition, we have adapted our process to still be able to thoroughly assess the constituent funds. IMA Absolute Return is a prominent example, as the plethora of different strategies used in the space means one has to be careful when comparing funds.
We have broken down the sector into its 11 separate strategies, ensuring that if we are targeting a specific type of fund style, whether it is market neutral, multi-asset or long/short, we are able to choose from a pool of like-minded funds.
James Calder, research director, City Asset Management
“The IMA is about 90% there”
The new Mixed Investment sectors offer a lot of information investors will probably not understand. Although the FSA was unhappy with them, clients understood the terms ‘cautious’, ‘active’ and ‘balanced’ more easily than Mixed Investment 0-35% shares, Mixed Investment 20-60% Shares, Mixed Investment 40-85% shares or Flexible.
We look at funds on a like-for-like basis in some cases, but for the UK, in particular, we look at them altogether. When looking for an income or growth specific fund we can screen them from the whole group. When managers are putting together a new fund launch and prospectus, they will have their eye on what sector they want the fund to invest in, and they will tailor the fund to whatever sector they want to be in.
When it comes to funds in the Specialist sector, we tend to be looking for an offering that fits a particular trend or theme we like. So we search that particular area rather than the Specialist sector as a whole.
Whether you think it is doing a bad job or not, the IMA has to change something. On reflection, overall we think they are doing quite a good job. They are 90% there.
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