The Investment Association – the asset manager trade body – has confirmed to Trustnet that it has relaxed the parameters for membership of all its sectors, which could allow some managers to go beyond previous limits on things such as overseas exposure and asset class allocations for a limited time.
The decision to allow fund managers to go beyond the sector parameters as a response to the Covid-19 pandemic could potentially make comparison for funds more challenging.
Each sector under the IA’s supervision has a clear definition, setting out the criteria a fund must fulfil for membership. Classification into sectors allows investors and advisers to compare similar funds and strategies.
The IA told Trustnet that the decision to focus on the two equity income sectors was taken as these were the two most likely to be affected by the pandemic.
At the same time the equity income press release was distributed, however, the IA provided additional guidance to members that it would be willing to extend such flexibility to funds in all the sectors.
The trade body noted that such flexibility is not being extended to funds automatically and that there must be evidence to suggest the manager was unable to meet the sector’s requirements due to Covid-19.
The system is overseen by the trade body’s Sectors Committee, while an independent monitoring company checks funds monthly to ensure they comply with the sector definition. Usually, if the fund is non-compliant with the sector definition, the committee can remove the fund from the sector.
Under current guidance, however, when a fund fails to meet the sector requirements the IA will enter into dialogue with the asset manager.
If the circumstances of its non-compliance with the sector come as a result of Covid-19 and require a longer-than-typical period to come back into alignment, the IA will allow up to six months for it to become compliant again.
Since being released in April, the guidance was reviewed in September by the Sectors Committee – made up of IA members, IA staff and third-party data companies – and will be reviewed again in January.
“The point of this is to give fund managers some flexibility so that they can avoid taking investment decisions purely in order to stay compliant with the sector requirements in the short term, given everything that is happening with Covid,” the trade body noted. “The fund manager’s focus should be on the best interests of their investors in the long term.”
The change in guidance for the IA’s sectors has not been as widely publicised as those for its two equity income sectors and there are some concerns that investors may not be aware of the change.
Adrian Lowcock (pictured), head of personal investing at investment platform Willis Owen, said while the suspension of parameters in the equity income sectors made sense, given the economic backdrop, there was less of a case for other sectors. 
He said: “The issue for investors is that the whole point of these categories is that investors know what they’re buying and know what the rules and limits are on what they’re buying.
“As soon as you remove those rules and limits, it naturally weakens the strength of them. When they did it for the income space it made sense because it was an exceptional circumstance. But doing it for the other spaces? Does it really matter?
"What’s more important the category or whether a fund flips into another [category] for a period?”
While the changes are unlikely to impact on performance or comparison with the peer group, investors should be keeping an eye on the allocations within the funds they own or are researching.
Lowock continued: “While these IA sectors are useful as categories, they’re not an alternative to doing your own research because its important to oversee what’s going on in the fund that you’re buying and not trust somebody else to tell you.”
Darius McDermott, managing director at Chelsea Financial Services and a member of the IA’s Sectors Committee, said the change to the equity income sectors was a sensible decision and that there should be some flexibility on a short-term basis when funds don’t comply with sector criteria.
He said: “This was not just a crisis, this was a crisis that led to dividend cuts on equities where there is a sector requirement. So, I think the relaxation of that rule was appropriate.
“I think there’s always been flexibility on a short-term basis but the IA sectors are there for a reason which is allowing IFAs, investment managers and the public to make some form of sensible comparison against each other.”
However, McDermott said where managers have taken outsized allocations beyond there sector parameters there would need to be some reassessment of whether they remain in the peer group.
“People should have some flexibility in the short term, but in the long term [for example] if you want to be a UK fund you need to have 80 per cent in the UK; if you haven’t then you shouldn’t be in that sector,” he finished.