Fund groups urge IMA to follow Morningstar lead on AR sectors

Fund groups have applauded Morningstar’s move to scrap its absolute return sector in favour of 18 different alternative investment categories, calling on the IMA to consider a similar move.

Last week, Morningstar said the newly created sectors would offer investors clearer descriptions in the underlying strategies and asset classes and moves away from the term ‘absolute return’, which has faced scrutiny in recent years.

Christopher Traulsen, director of European and Asian fund research for Morningstar, said: “Absolute Return as a fund category definition has become too associated with a broader industry marketing term that has made performance promises that have often failed to deliver,”

Underlying portfolio and risk exposures now determine Morningstar’s category selection, with funds further organised by region, asset class, and specific types of strategies.

Robert Higginbotham, CEO at Fidelity International, welcomed the change: “This seems like a move in the right direction and makes a positive contribution to the debate around absolute return. With the IMA yet to complete its review on this extremely diverse sector, Morningstar’s new categories should be considered as part of the process.”

Dan Mannix, RWC’s head of business development agreed: “This is a very positive development as it will help investors compare similar strategies. We would hope other providers of sector data, including the IMA, will consider using this approach. 

“Macro funds and long/short funds are typically highly liquid and have the ability to suppress volatility and achieve good returns. They also provide diversification against long-only bond and equity funds. The new classification will give investors
the ability to better understand the range of new strategies available and how different managers compare to one another.”

Fund groups have been calling on the IMA to address its own Absolute Return sector definition since its launch in 2008, as it does not give details on the different asset classes and volatilities within funds. Earlier this year, the IMA announced it would review the sector and later said it would link absolute return funds to managed vehicles, labelling the sectors Managed A through to D according to risk profile with effect from the end of July.

The decision caused uproar among its members, and the IMA was forced to stall any permanent changes until October, pending further analysis.

Graham Bentley, head of UK proposition at Skandia, also urged the IMA to look at the Morningstar changes, although he pointed out the vast array of sectors may be aimed at the more sophisticated investor.

“Before we had a hotchpotch of all sorts of different funds that called themselves AR, and people believed they were going to get a positive return.

“I think it needs to be for more sophisticated investors that can understand these sectors, but as a way of grouping funds, it is great.”

Jane Lowe, director of markets for the IMA, said the association would consider the Morningstar changes in its ongoing review, but is unlikely to make a similar move purely because of the number of funds in its peer group. “We are certainly not going to come up with lots of hedge fund type sectors as we do not have enough funds to divide up in this way.”

Morningstar is dividing over 3,000 worldwide share classes whereas the IMA is looking at about 70 funds registered for sale only in the UK.

However, she added Morningstar’s approach to the sector names is interesting: “Morningstar has moved from definitions, which were outcome focused, to just describing the assets or strategies. It is going back to the input approach – the outcome is for the investor to determine. This is fine, we do this with our asset-based sectors, and the absolute return sector was quite a marked change from this when it was launched.”

The IMA’s current definition for the AR sector is: “Funds managed with the aim of delivering absolute (i.e. more than zero) returns in any market conditions. Typically funds in this sector would expect to deliver absolute (more than zero) returns on a 12-month basis.”

Lowe said the review is looking at whether this definition should be tightened or the sector should be divided.

Meanwhile, the IMA confirmed it is consulting members about the creation of Global Equity Income and European Equity Income sectors in response to calls from fund managers.