Call a spade a spade
The IMA has undertaken a reclassification of its managed sector, and now awaits an industry response
The Investment Management Association has been roundly criticised over the past weeks following the announcement that, after a lengthy review, it intended to change the names of its Active, Balanced and Cautious Managed sectors to Managed A, B and C.
It will also introduce a new category 'Managed D' for funds with a risk profile that sits between the Cautious Managed and Absolute Return sectors. Apart from that, for now, everything remains the same regarding maximum and minimum allocations to equities and bonds.
Having been on the receiving end of such derision the IMA countered by asking its critics: 'Well, what would you have done?' As yet satisfactory, workable, solutions to this have so far not emerged but the industry has until the beginning of July to submit them.
To put it all in context, the primary reason for the existence of sectors is for investors to understand the basic remit of those funds and, second, for them to compare their performance characteristics with similar strategies. Therefore, sectors like asset classes should be distinct from others sectors and homogeneous within that grouping. The population must also be large enough to be meaningful.
If I run some basic analysis on the IMA North American Smaller Companies sector I am reasonably happy that I am comparing like with like. But even then a simple performance ranking will not suffice. What is the fund's benchmark and tracking error? Does it invest in micro-caps or mid-caps as well as small caps? Will the fund remain fully invested at all times or will it utilise its ability to go up to 20 per cent in cash (or even into other asset classes)? Only this information, and more besides, will help me choose a fund, but the sector is undeniably a useful starting point.
The managed sectors are a different proposition. Ten years ago managed funds invested predominantly in UK equities and bonds. Today funds can be much more flexible and dynamic in generating returns. Multiple asset classes can be included as well as derivatives and a measure of leverage. This flexibility can dramatically improve risk-adjusted returns, but lumping funds into sectors with broad definitions is consequently becoming much less instructive.
The managed funds themselves also have widely varying aims. Some still hope to achieve that wonderfully vague ambition of "capital growth over the long-term" while others strive to outperform a mixed benchmark or peer group on a relative basis. Others still opt for an absolute return, usually in excess of cash. With all these different targets in mind, and varying methods of achieving them at managers' disposal, the managed sectors are anything but homogeneous.
However, there is some commonality implied by the flexibility and discretionary nature of the portfolios within the managed sectors and perhaps more importantly investors get a sense of relative riskiness compared to other mixed asset funds in other managed sectors.
