Multi-assetFeb 16 2014

How has move from managed changed fund selection?

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It could be age, capacity for loss, how many children they have or any other aspect of their financial and family circumstances.

The financial services industry’s overseers try to make sure communication to advisers is relatively standardised, certain information is included and misleading language about ‘promised’ returns is avoided.

The success of this will be taken with relative degrees of scepticism by advisers, but the industry does regularly change its help and guidance in a bid to keep up with the times – and of course assist advisers with their investment choices to try to remove some of the burden.

One of the recent changes was the naming conventions of the multi-asset IMA sectors, now known as Mixed Investment sectors.

The IMA made the change to the names amid much hubris from the industry. The trade body had at times found itself criticised for the use of ‘Cautious’, ‘Balanced’ and ‘Active’ as sector names because of the potential for these to mislead clients.

After all, what is ‘Cautious’ and weren’t all the funds being ‘actively’ managed?

So it decided, along with the Association of British Insurers, to adopt a new naming convention for them.

Nicola Kembey, IMA head of sectors, says the name changes “successfully provided clear, jargon-free names, and aligned the IMA and ABI sectors in an important part of the long-term savings market”.

She adds that the decision was “informed by qualitative and quantitative consumer research as well as consultation with market participants, including IFAs”.

At the time of the change in 2012 reaction was mixed, with star managers including Jupiter’s John Chatfeild-Roberts calling the changes “a lot of rubbish” driven by a fear of potential law suits over losses. Investec Asset Management’s Alastair Mundy stated his flagship Cautious Managed fund would not change its process in spite of it facing more restrictions than when it was housed in the previous guise of the ‘Cautious’ sector.

Bill McQuaker, head of multi-asset at Henderson, showed a bit more sympathy by acknowledging the “almost impossible task” that it is to group a wide range of funds in a clear and useful way.

The verdict

But with the changes now well bedded in – as well as a fourth sector, 0-35% Shares sector, which was subsequently launched – has anything changed for advisers? Do the sectors still provide a use or do advisers see them as merely as a way of showing clients relative performance?

Kevin Morgan, managing director at Consilium Financial Planning, says the sector changes had not helped.

“Equity exposure has always been a proxy for risk,” he said, “but risk is and always has been all about downside not the upside. It is incumbent on the adviser to inform/advise the investor of the equity component and attendant risk factors regardless of the name/term given to any particular sector.”

Andrew Alexander, head of investments at Three Counties, says the name changes had “altered nothing”.

“If fund selectors were not aware of the IMA equity constraints under the previous branding, then frankly they should not have been picking funds in the first place,” he argues.

“Furthermore, ‘Balanced’ or ‘Cautious’ is in the eye of the beholder; what I perceive as balanced may not be the same as an adviser down the road and, as such, categorising volatility experience based upon asset allocation grounds solely is very disingenuous.  The same can be applied to risk-rated funds.”

Mr Alexander notes the Fidelity MoneyBuilder Balanced fund has a maximum drawdown over the past three years of 2.49 per cent, whereas the Blackrock Balanced Managed fund has a maximum drawdown of 15.08 per cent over the same period.

“These funds are in the same sector, yet the experienced volatility of the two funds is entirely different,” he points out. “On an average drawdown basis this equates to 1.67 per cent v 6.2 per cent – a massive difference.

“The question should be do the IMA’s managed sectors do more harm than good?”

Philip Milton, managing director at Philip Milton & Co, questions what was meant by the old sector names. He had used ‘Balanced Managed’ as a style of description for clients at times but questioned the use of the title.

He says: “What did they communicate? Although, what does the title Mixed investment 40-85% shares sector communicate?

“We shall use our own descriptions and try to continue communicating with clients in ways they may have a hope of understanding. The new title is really the descriptions, which should go underneath the old title and not a title in itself.”

Mr Milton says the sector title changes had not changed his “contrarian approach to investment selection and funds”.

But adviser Dan Clayden, director at Clayden Associates, is more optimistic about the changes, stating the new names gave a “far more clear description”, which helps advisers.

“Having the clear description of the amount of equity exposure is far better than the wishy-washy names beforehand,” he says.

The adviser adds he thought equities were an established proxy for risk, meaning that highlighting this exposure through the sector names was a positive thing.

Risk-rated risks

Mr Clayden says he is more concerned about the growing trend of risk-rated funds, which he believes have to a degree returned the advice sector back to the ‘managed fund’ days when clients’ cash was put in a fund run by one provider.

“We went from a managed fund with one provider dealing with the investments, to a more diverse set of recommendations of core and satellite funds and now we have almost come full circle to lump clients’ money into a ‘managed fund’ or sorts.

“At least, I suppose, risk-rated funds tend to come in ranges now so there is more than one to choose from to better fit a client’s risk tolerance.”

The IMA’s Ms Kembey says the IMA will “continually monitor the market to assess the need for further changes”.

“While a degree of stability is important, the IMA sectors try to reflect market evolution as well as feedback from members to ensure that they are still relevant and helpful for the users,” she added.

Looking at the development of various types of multi-asset fund - risk-targeted and risk-rated being the most prominent – one would suggest the next IMA sector development needs to be far more radical than a name change.

If the sectors are truly to evolve and be of use, it seems the next natural step is to create sectors to house these new fund types in and provide advisers with a way of comparing the bourgeoning and morphing multi-asset space.