The names Cautious Managed and Balanced Managed may mislead investors as they do not accurately reflect the risk profiles of many funds in those sectors, warns HSBC Investments.
Dan Rudd, head of external distribution at HSBC Investments, says the cautious and balanced labels attached to many managed funds imply high diversification and relatively low risk. However, he says most funds carrying the labels tend to concentrate on UK equities and corporate bonds.
The Investment Management Association (IMA) recommends funds hold up to 60% of their assets in equities to qualify for inclusion in the Cautious Managed sector and up to 85% in equities to qualify for the Balanced Managed sector.
However, Rudd says many funds invest near the maximum permitted levels in equities and many funds concentrate on the UK.
He says: “Considering the dominance of equities and the UK focus, it is fair to say that many such funds could hardly be described as cautious or balanced, though many are happy to call themselves this.
“For clients seeking a managed approach, intermediaries need to ask themselves whether it is appropriate to rely so heavily on equity markets, particularly when there is such a strong focus on the UK. The UK equity market accounts for around 10% of global equities according to MSCI [Barra], and there is little advantage in UK based investors being heavily exposed in their home market.”
He says investors increasingly want exposure to hedge funds, private equity and currency as their sophistication grows and says managed funds should have an advantage as they can potentially offer representation in the asset classes.
He says: “However, these asset classes are generally overlooked and are at best woefully under represented. These modern investments can offer important benefits and opportunities, and as they generally have little correlation to equity markets, they should be useful additions to a diversified portfolio.
“Perhaps it is time for clearer labelling and naming conventions for funds. This would ensure that funds which are globally invested and multi-asset are recognised as such and that this distinction is clearly defined. This would enhance transparency for advisers and investors, allowing them to more easily identify where their money is being invested.”
A statement from the IMA says: “IMA sector definitions are asset-based, not risk-based, and funds which populate the Cautious and Balanced managed sectors invest in a range of assets.
“The nature of the managed sectors is that the funds are actively managed and typically will offer a certain amount of exposure to each asset class, depending on their outlook for returns in the asset types at different points in time.
“The IMA sector names have existed for many years for the benefit of consumers and their advisers; changing the names would risk confusing those they are meant to help.”
To comment on this story contact:
Tel: 020 7034 2679
E-mail: [email protected]
Despite improved risk appetite
FOS award limit increase
Relates to 136 million transaction reports
Ceremony will take place 13 November