As the IA points out in the introduction to the consultation paper it released yesterday: “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.”
The industry body has proposed two solutions, the less radical one is to move such outcome-focused funds into a new sector that fits alongside the existing mixed Investment sectors, while the more radical approach would see it overhaul the entire system, creating a new categorisation for outcome-based funds and dividing all funds first into either an asset-based or an outcome-focused bucket.
But, as it points out, the question to answer before choosing the second option is whether or not this move is permanent, or merely a function of “recent market cycles”.
The answer, is as yet unknown, but as one of the IA’s goals from a classification system is to maintain stability and avoid having to ‘chop and change’ its decisions, one could argue that even presenting option three implies there is at least some people of the view that this is indeed the case.
Putting numbers to the problem, the IA points out that of the 475 funds in the unclassified sector with a value of around £80bn, 200, with over £30bn in assets aim to produce an outcome, – most seek to match a client’s attitude to risk or other outcome through strategic asset allocation. These funds represent 5.7% of the total number of UK authorised funds, but just 3.3% of AUM.
Indeed, it adds: “Funds targeting volatility outcomes appear to be a large part of the product set that has been launched, with others launching asset allocation funds with broader objectives to address retail investors’ focus on the risk of capital loss rather than the volatility of returns.”
Given the sheer number of multi-asset teams that have been created in recent months and the continued focus on the ‘at retirement’ market that has been brought about by the imminent pension freedoms, as well as the changes to the advice industry wrought by the Retail Distribution Review, there is strong evidence to believe that the focus on outcome investing is likely to remain.
As BlackRock’s Jeremy Roberts put it to Portfolio Adviser last year, by way of explanation of his view that such products are the way the sector is moving: “Does a client with £20 000 to invest care about beating a notional benchmark? No, they want to be safe in the knowledge that their goal will be met, whatever that goal is.”.”
That is not to say that asset-based funds no longer have a place, nor that they will eventually be replaced. But, rather to suggest that there is a place for both. And, whatever comes out of the consultation paper, merely discussing them and the role they are likely to play in the future provides them with the credibility that arises when things start to come of age.
