Outcome-based funds in spotlight after pension freedoms

Outcome-based funds in spotlight after pension freedoms

Focus is falling on how to cope with the growing number of ‘outcome-based’ funds which have launched in recent years and come to the fore in the wake of pension freedoms, amid a major consultation by the Investment Association.

In February this year, the IA launched a consultation on the ‘unclassified’ sector, which houses £30bn of assets including nearly 200 funds with an ‘outcome’ focus, that is generating a given return or meeting a particular risk rating rather than meeting allocation targets.

It offered three options including not making any changes and leaving funds where they are, or setting up a new sector for outcome-focused funds which would sit alongside existing IA ‘mixed investment’ multi-asset sectors.

The final third option is to undergo a major reorganisation of the basis of the sector classification scheme to create two distinct areas: one for asset-based funds and one for out-come focused funds.

Henry Cobbe, managing director and head of research at Birthstar Funds, a provider of ‘target-date’ funds which shift allocation based on progression through retirement, told FTAdviser he favoured the latter option the industry has too far been focused on asset class funds.

“I think there’s a challenge out there for the fund research providers to work out how to evaluate these solutions type funds because right now it is a growing part of the market. It is already much larger than it was, and it has continued to grow very fast.

“Because of the growth in simplifed advice and DIY investing and also in the whole new pension freedoms we expect there to be ongoing growth in these outcome orientated funds... I think that it is not good enough just to say how does a fund do compared to the unclassified sector.

“From our point of view it is not just about what the Investment Association does, it’s more challenging the fund ratings industry.

“There’s a vast and growing sector of solutions type funds, there’s a huge prize for the fund rating company that can work out how to evaluate them consistently and methodically and in a way that is informative to advisers and consumers.”

Jon Gumpel, investment director and co-founder of Brooks Macdonald, agreed there are “too many” unclassified funds and it is “too much of a bag of nails because they don’t feel they fit the other sectors”.

“I think having a means of providing appropriate benchmarks for a good 60-70 per cent of the funds in the unclassified sector would be helpful for managers and helpful for the investors in terms of market information and being able to compare apples with apples.”

However, while he said that sorting out the problems of the unclassified sector was “great”, he said he would not support a full reorganisation of names and functions of the mixed sectors and absolute return because “they are all relatively set and stable and understood”.

Mr Gumpel added that there is a danger that people are focusing on outcome-based funds for pensions in light of recent changes, which could lead to “poor funds” being badged with the “right badge”.