Richard Saunders, chief executive of the UK-based Investment Management Association, has hit out at the vitriolic criticism the trade body has come in for over its recent review of its fund sector classification scheme.

Last month the IMA announced that the Managed sectors – Active, Balanced, Cautious – were to be re-named Managed A, Managed B and Managed C, with a new Managed D sector.  The new sector names have been chosen in order to highlight that the funds are in some way “managed” – which indicates that the manager has a degree of discretion (in this case relating to a degree of freedom over asset allocation) that is not present in all sectors. 

Following the announcement, the IMA came in for fierce criticism from firms including Fidelity International, which slammed the new sector differentiation as “meaningless” and as actually increasing opacity for investors.

Via his blog, and with equally high conviction, Saunders yesterday rebutted claims that the IMA had failed to satisfactorily clarify the difference between cautious, balanced and active funds, and their differing risk profiles.

“The issue is the names of our 'managed', or mixed asset, fund sectors.  Most of our sectors are confined to a single asset class, and naming is straightforward.  In contrast, managed funds aim to deliver an optimal return for the risk that is being run through a judicious mix of equities, bonds and cash, which is adjusted as market conditions change,” Saunders said.

Saunders also contends that, based on the IMA’s evaluation of the performance of the various types of fund, the three sectors “look broadly right”. “The active ones delivered on average higher returns but with higher volatility than the balanced ones, which in their turn showed higher returns and higher volatility than the cautious funds,” he said.

He then asked that critics of the proposed name changes remember that the sector names are not designed to convey advice, but are merely a way of grouping comparable funds.

“One approach to naming would be to get out the thesaurus and look for different adjectives.  But it quickly became clear that words like 'defensive', 'flexible', 'aggressive', 'dynamic' and so on would run into exactly the same problems as the existing names,” the statement continued.

“Another would be to describe in neutral terms the asset allocation.  But something like “mixed asset – maximum 60 per cent equities, minimum 30 per cent fixed income and cash, at least 50 per cent £/€” would be not only too long but more to the point would simply have confused most investors.”

An alternative approach, which Saunders also dismissed as unworkable would be to describe the funds’ investment objectives. “The problem here is the absence of a benchmark, like a market index. 'Higher volatility, with prospective higher long-run return'?  I don’t think so.  But 'higher volatility' on its own would not really do the trick either,” he said.