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Cautious managed fund sector name to be scrapped

27 May 2011 / by Paul Dicken

The cautious, balanced and active managed fund sector names are to be scrapped, the Investment Management Association (IMA) has said.

The IMA, which divides UK investment funds into sectors to assist investors, has announced that the current Cautious Managed, Balanced Managed and Active Managed sectors will be replaced by generic Managed A, B, C sectors, with a fourth Managed D to also be added.

The change, which has already provoked some criticism, is designed to show only that the investment funds in that sector are ‘managed’ and that the fund manager has discretion to invest in various areas.

The new A, B, C and D sectors are deliberately not designed to provide more information, but instead require potential investors to look more closely at how the fund invests, as this can vary within the existing cautious, balanced and active managed categories.

Losses incurred by funds following the 2008 financial crisis prompted some concern that sector names contributed to an ‘expectations gap’ for investors.

The conclusions of a sector review, which began last year, said: “The use of A, B, C and D does not even indicate the order of the risk/reward hierarchy across the four sectors, and to access this information the user would have to access the definition.”

New sector definitions

The definitions for the sectors are designed to provide a breakdown of the assets in these funds.

For example, Managed C (which effectively replaces the Cautious Managed sector) is defined as a fund which offers: ‘investment in a range of assets, with the maximum equity exposure restricted to 60% of the fund and with at least 30% of the fund invested in fixed interest and cash.’

A new Managed D sector will be created which will sit below the Managed C sector on the risk/reward hierarchy. The IMA will consult on this sector later this year.

Managed A replaces the Active Managed sector, with funds able to invest in a range of assets but with the discretion to invest up to 100 per cent in equities. Managed B replaces the Balanced Managed sector; again, this type of fund could invest in equities, cash and fixed interest assets, but has a maximum equity exposure limit of 85 per cent.

When the changes will happen

The new Managed A, B and C sectors will come into effect from 1 July 2011. Some investment funds currently use the existing sectors in their names, so this may change following the introduction of the new sectors.

However, the IMA review said: “We give no guidance on names that funds may choose to adopt. We note that the new sector names do not rule out the use of existing names. It is for managers to decide on the name that they believe is right for their fund, subject to taking account of the Sectors Committee view on what could be misleading.”

The Sectors Committee believe it is misleading for a fund to use a sector in its name if it is not classified in that IMA sector.

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