The issue came to a head most recently when FE Analytics announced it would stop using the IA classification for risk-targeted funds within Mixed Asset sectors, because it said, “risk-targeted funds are not being well represented in the IA Mixed Asset sectors”.
As the IA points out: "There is increasing evidence of a move away from a retail product environment in which investment funds tend to be used as component building blocks in a wider strategy. Instead, outcome-focused fund solutions are being offered as a one-stop shop for asset allocation or risk management.
It added: "There are 475 funds with a value of c. £80bn in the Unclassified sector, of which there are currently close to 200 funds with over £30bn of assets that aim to produce an outcome."
The industry body has outlined two possible solutions to the problem after discarding the possibility of leaving such funds in the unclassified sector as unviable because it would not provide enough transparency to a growing area of the funds universe.
The first option proposed is to: “create a broadly deined additional sector under the mixed investment heading for outcome-focused funds which currently may be recognised under the terms multi-asset and risk-targeted”
The second option is to: “create a large umbrella sector primarily to capture information on these funds as a first step.”
According to the IA, while the first suggested option represents an incremental approach.
“Funds that use an asset allocation strategy to deliver a specified outcome would be put in a separate sector which would sit alongside the Mixed Investment sectors. The distinction between this sector and the existing Flexible Investment sector would be that the funds’ stated objectives would be outcome-focused as opposed to asset-focused.”
And, it added, while it is possible that some such funds would have other, additional outcome aims, it is, as yet, unclear whether or not the funds in the new sector would need to be further broken out and, if so, where these would fall in the overall schematic.
The second option, is a more radical approach, the IA said, and would entail a major reorganisation of the entire sector classification system, dividing it into sectors that are asset-based and those that are outcome-focused. This second category would include sectors such as the Targeted Absolute Return sector and the Protected sector as well as a new sectors.
“As part of this process, we would also create a broad definition to capture all types of outcome-focused funds (excluding those already defined such as TAR and Protected), and provide a tool to allow users to filter funds on select criteria that they believe may be pertinent to narrowing the fund population. This tool would be similar to that developed for the TAR sector,” the IA said.
Jonathan Lipkin, director of public policy at The Investment Association, said: “The investment fund universe is changing rapidly with a significant rise in the number of outcome-focused funds. In looking at how to accommodate this trend, we have a number of options and an opportunity to take a fresh look at the overall shape of the sectors framework. We welcome input from all interested parties as we consider how to move forward.”
