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Which? welcomes ABI investment sector changes

But action is needed on fund labelling

Cautious sectors to be scrapped

The ABI found that sector labels like ‘cautious’ and ‘balanced’ confused consumers

The Association of British Insurers (ABI) has today (28 February) announced that it will scrap its managed investment sectors and replace their labels with less misleading names.

In the February edition of Which? Money, we called for the reassessment of investment sectors labelled Cautious and Balanced, stating that they were confusing for consumers and not truly representative of the investment funds that sat in those sectors. We raised these concerns again earlier this month when RBS launched new Cautious and Balanced investment funds.

The ABI’s changes, which will be applicable to life and pensions funds, will affect four of its managed sectors and will take effect from April 2011.

What are the ABI’s new investment sectors called?

The ABI has scrapped four of its sectors and renamed them:

  • Defensive (up to 35% equity) will now become Managed Mixed Investment 0-35% Shares
  • Cautious (up to 60% equity) will now become Managed Mixed Investment 20-60% Shares
  • Balanced (up to 85% equity) will now become Managed Mixed Investment 40-85% Shares
  • Flexible (up to 100% equity) will now become Managed Mixed Investment 60-100% Shares

Why has the ABI renamed these investment sectors?

The ABI carried out consumer research in December 2010 and found that many consumers believed that sector labels like Cautious and Balanced meant that the investments within them carried less risk. One of the ABI’s key findings was that 80% of consumers believed that the ‘cautious’ sector was a low-risk investment sector. 

Research from Which? has found that many of these so-called ‘cautious’ investments can carry high risks and have a lot of investment in shares (equities), one of the riskiest asset classes. We found that in the Investment Management Association (IMA) Cautious Sector, the average equity weighting in funds was 42%, much higher than a typically cautious investor might want.

And most recently, Barclays was slapped with a record £7.7m fine and ordered to pay £60m in compensation for advising its customers to invest in cautious and balanced funds that were much riskier than its investors were expecting.

Will the changes clear up confusion for investors?

Which? welcomes the ABI’s quick changes to the sector and the IMA (the trade body that represents the asset management industry) is evaluating their own sectors and will look to make changes this year.

But there is still the problem of the funds within the sectors and their labels. For example, the IMA’s Cautious Managed sector contains 56 funds explicitly called ‘cautious’ while the ABI’s Cautious Pensions sector contains 138 funds and the Life sector contains 130 funds called ‘cautious.’

So while the sector names might change, the actual investment funds will continue to be called cautious.

We would like the Financial Services Authority (FSA) take action and force investment companies to remove misleading labels from their funds. This way, consumers may not be so exposed to the risk of investing their money into a product that does do what it says on the tin. 

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