Speech by Jane Lowe, Director Markets, Investment Management Association to Portfolio Adviser seminar

Transcription

1 Absolute Return funds Speech by Jane Lowe, Director Markets, Investment Management Association to Portfolio Adviser seminar 1 February 2012 Good morning. I am very pleased to be able to speak to you the intermediaries - about Absolute Return funds in general and about the IMA Absolute Return sector in particular. I hope that what I say will offer some insight into our review of the Absolute Return sector, about what we are trying to achieve and why. And I am certainly interested to hear from you in return. What we are concerned with is where these new style funds fit within our sectors and whether we have correctly defined them as a group. The IMA sectors But first I d like to revisit a few basics about the sectors in general. Well, our sectors are no more, and no less, than a classification scheme that divides up the large authorised fund universe into bite-sized groups. There are over 2,500 funds in our sectors, about 90% of which are UK funds and 10% offshore European domiciled funds. The funds are divided between 35 sectors, averaging about funds per sector. The Absolute Return sector has 78 funds in it. The sectors operate on the basis of self regulation by the fund management industry, with independent monitoring of fund portfolios provided by a third party data provider: Morningstar UK. Each sector is defined. The IMA, with the support of the Sectors Committee, takes responsibility for the integrity and development of the sectors overall. The Committee is drawn from our membership and from the data vendors, pulling in a wide range of experience. IMA staff handle the day-to-day classification of funds and deal with breaches of the sector definitions based on reports from Morningstar. The Absolute Return sector But to return to the Absolute Return sector, one point I would like to make is that we are aware that the Absolute Return sector is different from most other IMA sectors. Why is that? Well, let me offer 2 reasons: Firstly because IMA sectors are usually defined to embrace funds already in existence, a bottom-up process if you like. But in the case of the Absolute Return sector, although we consulted at length with our members about the shape and content of the new sector, unusually this happened before enough funds were in existence to spark the definition. It was therefore much more of a top-down process and it means that many funds have subsequently fitted into the definition rather than the definition fitting around them. This is not ideal in our view.

2 Secondly, Absolute Return funds are what we call outcome based funds and as such they do not fit easily within the IMA sectors scheme which is mostly input driven. To put that in plain English, funds in the Absolute Return sector are bound together by an outcome: their aim for a particular performance goal; by contrast funds in the UK All Companies sector are bound by an input: the requirement that the funds will be invested in not less than 80% of UK equities. In both cases the outcome is uncertain; but perhaps in the case of Absolute Return where the focus is on the outcome and the outcome is precisely described, there is more obvious opportunity for disappointment. Since the start the sector has seen rapid growth. Funds under management at the end of December 2011 amounted to 23.8 billion, approximately 4% of the total funds managed. The sector has a small number of dominant funds but that is not unlike many of the sectors, as it happens. Two of these funds have a substantial institutional flow of business. However, a fair number of other smaller funds in the sector show quite healthy retail sales flow, so it cannot be said that this is a sector that is institutionally dominated. Performance, which is integral to the definition, shows a more mixed picture. The sector definition, as you can see, binds the funds within it by two linked criteria: the aim to make a return of more than zero regardless of market conditions; and to do so over 12 month rolling periods. At the end of December 2011, of the funds in the sector: 25 achieved the aim; 1 came in at zero; 37 failed the aim; and for 12 funds the data was not available. I note in passing that hedge funds as a category are now embedded as an asset class exposure in, for example, the APCIMS intermediary benchmarks, with 5% allocated to hedge funds for a Balanced portfolio. The Absolute Return sector review I mentioned at the outset that we were doing a review of the sector. To give you context here is an extract from the published Terms of Reference of the Sectors Committee: The primary purpose of the IMA s approach to sector classification is to provide groups of similar funds whose performance can be fairly compared by consumers and their advisers. To date we have treated the Absolute Return sector as immature, which means we do not feel that the funds within it are sufficiently like-for-like to allow performance comparisons to be made. The funds have in common the same aim of a more than zero return and the same time-frame for delivery. But they also use different assets, different benchmarks and offer varying risk characteristics. So until we have squared that circle we cannot say that the sector has reached maturity. Even so our aim remains to meet the primary purpose of the sectors and have a sector which does allow performance comparisons to be made. As in previous years we have analysed data about the funds in the sector and sought views from the membership on the best way forward. There is a wide range of opinion

3 across the fund managers. Some favour an asset split; some would like to change the timeframe or incorporate more than one timeframe; some favour a volatility measure for funds in the sector; others would like a common benchmark to be introduced; and others want the sector to be left as it is. Absolute Return funds are of course not unique to the IMA sectors. The ABI does not provide a separate definition in its sectors. Other sector providers, such as Morningstar UK and Citywire, have followed a style that is reminiscent of the hedge fund approach, dividing funds principally by strategy such as Long/Short Equity, Global Macro and so on. These approaches are valid too. However, they require a larger starting universe of funds than we have and we also think some of the categories may be seen as somewhat esoteric by consumers. Not many consumers buy funds direct, but they remain our principal audience nonetheless, reflecting the retail focus of UCITS and authorised funds. During 2011 we also carried out a review of the entire IMA sector classification scheme and of the Managed sectors within it. One shared view that came out of this was that Absolute Return funds, or even a sub-set of them, should not be absorbed into the Managed sectors. So it means that we started this review with a clear mandate to deal with the sector on a standalone basis and the first question is therefore whether the sector is in the right place in the classification scheme. At the moment it is held separately from the 3 main groupings of capital protection, income and capital growth. One option could therefore be to divide the Specialist groups of funds into sub-sections, in the case of Absolute Return indicating that its primary characteristic is a specified outcome. This would allow other outcome-based sectors to develop over time. It would be, if you like a variant of the hedge fund approach, but catered for within the existing style of the sectors. Research about users One thing we were clear about was that we had a gap in our knowledge. We do not know what the users think of these products. To fill that void we have commissioned independent research. It is still at the qualitative stage, by which I mean that the researchers are running focus groups and conducting in-depth interviews with IFAs and with consumers. It has been fairly straightforward getting in touch with IFAs from across the spectrum including Discretionary Asset Managers, panel formers, independent IFAs and IFAs working for a panel. By contrast the researchers have had to sweat blood to find consumers invested in Absolute Return funds, but they have managed it. Once we have the full findings from this stage of the research we will see if it is possible to design a quantitative survey to further test the findings. Meanwhile I can share with you a few interesting strands that have emerged from the research, although bear in mind that it is still at an early stage and these may not be substantiated by the full findings. There is a consistent strand that expresses unease about the sector objective and how it is achieved:

4 the objective is straightforward but the underlying process is very difficult to understand what about if the manager loses control [of the fund]? overly complicated and I don t think they ve done what they have said they were going to do, in general There is a strand that likes the additional diversification these funds can offer, prospectively in many types of portfolio: if they work they can be seen as possibly a low risk element to a portfolio; and they may not form the major part of a portfolio but they could be a low risk element to guard against falling markets There is a strand that expresses a concern that the funds are difficult to explain to consumers: We position them as Balanced+ with clients although they are really less risky, but the clients can t understand them They can t grasp the risks If in doubt, better to suggest to a client that it is more risky than it is And there is some indication that monitoring the sector might help. We think this is related to the first strand. What next? Whatever changes may occur to the Absolute Return sector, one thing we are clear about is that we need to supply better information to consumers. We are building a new consumer website which will provide accessible factual information on funds. Although quite a lot of it will be a repackaging of existing information, we are confident it will become a useful resource for consumers. As to the Absolute Return sector, it s still an open question. I have laid out the differences of opinion we have encountered and several possible options. These will be discussed by the Sectors Committee together with the research findings and the data analysis. We will consult on any proposed changes with our membership. Will it lead to the sector maturing? I hope so, but I can t promise it. You ve listened patiently to me. Are there any questions?

5 Absolute Return funds Jane Lowe Director Markets, IMA Portfolio Adviser conference 1 February 2012

6 Sector Classification All Funds Unclassified Funds that choose not to be classified into specific IMA sectors, or which have been removed from them for non-compliance. Fund Principally Targeting: Capital Protection Income Growth Specialist Fixed Income Equity Mixed Asset Equity Mixed Asset -Money Market - Short Term --Money Market -Protected - UK Gilts - UK Index Linked Gilts - Corporate Bond - Strategic Bond - High Yield - Global Bonds -UK Equity Income - Global Equity -- Income -UK Equity & Bond Income - UK All Companies - UK Smaller Companies - Japan - Japanese Smaller Companies - Asia Pacific including Japan -Mixed Investment % Shares -Mixed Investment % Shares -Mixed Investment % Shares -Flexible Investment -Absolute Return - Personal Pensions - Property - Specialist - Technology & Telecommunications - Asia Pacific excluding Japan - China/ Greater China -North America - North American Smaller Companies - Europe excluding UK - Europe including UK - European Smaller Companies -Global - Global Emerging Markets

7 Absolute Return sector IMA definition Funds managed with the aim of delivering absolute (ie more than zero) returns in any market conditions. Typically funds in this sector would normally expect to deliver absolute (more than zero) returns on a 12 months basis.

8 Sectors Committee Terms of Reference The primary purpose of the IMA s approach to sector classification is to provide groups of similar funds whose performance can be fairly compared by consumers and their advisers.