Call a spade a spade

While simply changing the names to A, B and C might seem like a huge cop-out, it will at least confine the current erroneous labels to history. Clients and investors should in future at least pause for thought and consider what the new labels actually mean in practice. And it's here that the real work begins for investors and advisers.

Funds should always be selected based on the investment objective, investment policy, risk profile, costs and the skill of the team managing the fund. You will not get this information from any sector classification and you will only get some of it from a fund factsheet. Unfortunately it will take some work but surely this is the role of the adviser. And the FSA has seen to it that marketing materials and investor communications are legion (and heavily complied).

Ultimately, clients are looking for funds which can clearly define how much risk they will exhibit. Risk to almost every client is the risk of losing capital, not the risk of underperforming a peer group.

Peer groups can be used to assess the relative success of a fund, but for clients who care about risk and return (which we believe is the vast majority of clients) rather than just return, a simple return/risk analysis of all funds in all the managed sectors will reveal the most successful managers. There will be funds which will sit in category C, which will exhibit more volatility than funds in category B. Ranking a fund should not be done versus an increasingly arbitrary peer group. Instead the success of a fund should be judged in terms of the return it generated for the risk taken, and whether the risk it took is in line with its policy and objective.

I have no workable, cure-all solution for the IMA – and I wish them luck in their thankless task of reorganising the equally heterogeneous Absolute Return sector. The IMA sectors are simply a starting point, a way of risk rating a mixed asset, managed fund. Beyond that it is 'let the buyer beware'. Further research must be done to ensure that the strategy chosen fulfils the end investor’s genuine risk tolerance.

James de Bunsen is portfolio manager of multi-asset, real return funds for Distinction Asset Management