Dan Jones  

No good answer to the IA’s mid-cap deliberations

Dan Jones

Dan Jones

Being part of the Investment Association’s sector classification committee is a thankless task. Critics on one side make the constant cry that the IA sectors are a relic that shouldn’t be used by any serious investor. Others do likewise whenever the committee attempts to change its rules.

The two positions aren’t mutually exclusive: you can believe investors should do their own research, while simultaneously believing that some sector rules can have a damaging impact. The unintended consequences of the old UK Equity Income yield targets were a case in point.

But the committee must sometimes feel that it can’t win, regardless. So its latest initiative, looking at creating a UK mid-cap sector, may have been undertaken with some trepidation.

You can understand the rationale. The FTSE 100 may have outperformed the mid-cap index over the past year, but this has been an exception rather than a rule over the longer term. 

Mid-cap funds tend to lead the way in the UK All Companies sector, performing better than the multi-cap products that constitute the bulk of their peer group. Separating them out would mean funds are more directly comparable.

Equally, you can understand the criticism: at what point does the slicing and dicing of sectors go too far? Although there will often be a good rationale for funds to step out on their own, it could prove a slippery slope.

Take the Global sector, home to all kinds of different equity funds, from healthcare to energy to ‘global brands’. The nature of these specialist products means they’ll always be at the top or the bottom of the rankings. There are few calls for a split here.

With 14 portfolios available, UK mid-cap funds are a slightly different case, but it’s not as if there has been a surge of launches in the asset class lately. Only two – an L&G tracker and a vehicle run by broker Numis – have been launched in the past four years.

The proposal for a new sector likely stems from multi-cap managers feeling they’re getting a raw deal, but the mid-cap fund providers whose opinions are being canvassed by the committee have little incentive to shift their products into a more competitive grouping.

So in the absence of a sudden benevolent turn from those providers, the committee may have to acknowledge the status quo – that the sector’s imperfections are too difficult, or too minor, to resolve.

Dan Jones is editor of Investment Adviser