"The problem is that there is a disconnect between how investors see Cautious and how the industry sees Cautious," said Graham Toone, who is head of investment research at AFH Wealth Management.
Following consultation with stakeholders, the ABI has decided to replace risk-based labels with factual descriptions of the level of shares involved.
The old Cautious (up to 60 per cent equity) Managed sector has been rebranded Mixed Investment 20-60 % Shares, while Mixed Investment 40-85 % Shares will replace Balanced (up to 85 per cent equity) Managed.
"They’re not the catchiest names but at least they say on the tin what the investments actually do," Toone added. "I’ve got no objection with what the ABI has done there."
Helen White, director of life and savings at the ABI, hopes the new names will help stop investors misinterpreting how a product can invest.
"It was becoming increasingly clear that terms like Cautious were confusing for consumers so the ABI was keen to act quickly and make changes to help customers," she said.
"We found that consumers want simple information about the minimum and maximum amount of their money that an investment fund will put into shares. The new fund sector names do just that."
A recent Trustnet study of volatility in the IMA Cautious Managed sector revealed that many funds were riskier than their name suggested and highlighted the need for a rethink on sector names.
The three most volatile funds in the Cautious Managed sector over five years are Henderson Managed Distribution, which had 14.69 per cent volatility over the period; Newton Cautious Managed, fairing slightly better with 13.31 per cent; and CF Milton Cautious Income Portfolio, which had a volatility of 12.78 per cent.
Newton Cautious Managed was the only one of these funds able to outperform the IMA sector average.
Performance of funds vs sector over 5-yrs
Source: Financial Express Analytics
IFAs have also hit out at the IMA Absolute Return Sector, saying it gives a misplaced perception of security.
The Investment Management Association (IMA) says it is considering an overhaul of how sectors are defined.
"The IMA has been evaluating its own sector classification scheme since autumn 2010. It is vitally important that this work is handled carefully in order to deliver the right result for consumers," said Jane Lowe, director of markets at the IMA.
"We welcome the work undertaken by ABI and will take it into account as we reach conclusions for our own sector scheme. However the timetable of any changes to the IMA sector scheme will remain distinct from that of the ABI."