The value of investment management association sectors has long been contentious, but it hit the headlines again earlier in the summer when several advisers, including Rayner Spencer Mills, suggested the current sectors were no longer suitable for advisers’ needs.
However, it is difficult to change the habits of the industry: the IMA sectors are known quantities, and have for a long time been widely favoured as a standard for grouping together similar funds. So what could we replace them with, and are there any other methods already used in the industry that could be adopted to better measure how similar funds really are?
There are several alternative measures to IMA sectors. These include risk-based systems such as Defaqto, Distribution Technology and Finametrica. Other measures could include the consistency of a fund’s management style, ongoing charges, the maximum drawdown and standard deviation. Risk-rated solutions do stand out as an effective and feasible alternative to IMA sectors.
Several large investment companies have already adopted a risk-based approach on some of their funds. Henderson, for instance, uses Distribution Technology on its Core Multi-Asset solutions range and the Old Mutual Spectrum Fund, which uses a risk-based approach and is unclassified by the IMA. Smaller fund houses are limited in their reach and distribution, not to mention their marketing budgets, which are unlikely to be as far-ranging as those of a firm like Henderson’s, so they may find it harder to get people to invest in any of their funds which are unclassified by the IMA.
Despite this, investment houses can take steps to make investors more open to putting their money into one of these funds.
However, these approaches still do not cover all eventualities. For instance, while investors with a similar risk profile are likely to require similar solutions, it is not clear what the most efficient way of deciding this would be. Also, establishing IMA sectors according to risk profiles may be a desirable approach, but is risk the only factor that investors need to consider?
Another issue is that many risk-rated funds have suffered from poor performance, and some investors have been railroaded into the wrong assets at the wrong time in order to satisfy their risk criteria. If we take a simple example in which a risk-targeted process might dictate that a client with a three out of 10 risk appetite should have 25 per cent of assets allocated to sovereign debt. The problem with taking such a simplistic systematic approach is that, while advisers might want to take a consistent approach, they might feel uneasy about piling money into gilts at that particular time. For instance, should interest rates be rising, this particular asset class would not perform as well. So does this mean they should ignore their own process and focus on a different asset? If so, on what basis? And what is the most effective way of judging what should be the precise trigger for this ‘off process’ approach to matching investments to a client’s needs?
