The Investment Management Association (IMA) has overhauled its managed sectors to remove labelling like Cautious, Balanced and Active from the way it groups investment funds, but Which? is disappointed with its proposals.
From 1 July 2011, the IMA, the trade body that represents the fund management industry, will replace its Active, Balanced and Cautious investment sectors, renaming them as ‘Managed A’, ‘Managed B’, and ‘Managed C’ respectively.
The intention is to remove subjectivity from the sector names, which have been criticised as misleading for consumers as they are often unrepresentative of the risk levels of the investment funds that sit in the sectors.
However, Which? believes the new sector names will only lead to more confusion for consumers, carry very little meaning and do not act as an appropriate signpost to help investors make good decisions when selecting investment funds.
Why is the IMA changing the sector names?
The IMA has sought to tackle the names of its managed sectors. A managed sector is one that is home to investment funds that invest in a range of different types of assets, most commonly a mix of equities (shares in companies) and bonds.
Its cautious managed sector is home to funds that are only allowed a maximum of 60% in equities and must have a minimum of 35% in fixed interest investments (like bonds and gilts). The balanced managed sector allows up to 85% in equities with no minimum in fixed interest, while the active managed sector allows up to 100% invested in equities.
Which? has criticised these sector labels in the past, as we believe they are unrepresentative of what consumers see as caution or balance in an investment. Indeed, the performance and volatility (a measure of the riskiness in an investment fund) have often been unrepresentative of a ‘cautious’ or ‘balanced’ investment. Further to the point, Barclays was slapped with a record £7.7m fine for selling investments labelled ‘cautious’ inappropriately in January 2011.
What are the new proposals?
The active, balanced and cautious sectors will be renamed Managed A, Managed B and Managed C respectively. The IMA stated that ‘the names are intended deliberately not to provide any other information about the sector.’ Jane Lowe, Director of Markets at the IMA, told Which? that this would lead investors to carry out more research into the sector definitions to get a better understanding of where they invest their money.
The IMA is also consulting on a fourth sector, provisionally called Managed D, for lower risk funds and also changes to its absolute return sector.
However, the IMA’s position differs from the Association of British Insurers (ABI), which renamed its sectors earlier on in 2011. It now calls its managed sectors ‘Managed Mixed Investment’ alongside the proportion that can be invested in equities.
Which?’s view on the IMA’s changes:
Which? investment expert Gareth Shaw said: ‘Which? is not supportive of the changes of the IMA has proposed. The problem with the previous sector names was that they were often misleading for consumers but the new plans will only engender even more confusion.
‘The IMA sectors are used as a signpost by consumers to research investment funds and are a useful starting point for investors to make their decisions. But using the new sector names, which have very little meaning, the path to finding the right investment will become even more opaque.
‘When the Association of British Insurers carried out its sector review earlier in the year, it undertook significant consumer testing before renaming its sectors. Which? is disappointed that the IMA, while consulting with financial advisers and the fund management industry, did not carry out direct consumer testing and, therefore, has limited evidence to support that its alterations will increase consumer understanding.
‘Investment can be often difficult to understand for consumers, and many have made poor investment decisions because of this. We urge the IMA to reconsider its proposals and create sector labels that are much clearer for investors.’
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