For immediate release: Thursday 10 August 2006

PERFORMANCE CATEGORY REVIEW COMMITTEE (PCRC) REVIEW OF THE UK ALL COMPANIES SECTOR

In recent years there have been calls for the IMA and its Performance Category Review Committee (PCRC)ą to review the UK All Companies sector, because of the number of funds populating it.  Following a consultation among IMA members, it has been decided that further sub categorisation of the sector should not be undertaken.

Background
Unlike many classification schemes, IMA members choose where they would like their funds to be listed and those choices are driven by the clear, fair and not misleading principles laid down by the FSA. The PCRC then monitors the funds to ensure they adhere to the sector into which they have chosen to be classified.

The UK All Companies sector is made up of 329 funds investing at least 80% in UK equities. The popularity of the sector, being the home market, leads to this large number of funds. Within this universe there are 39 index trackers, 19 ethical funds and 10 funds of funds. The debate as to whether to split the UK All Companies sector addressed the issues that have been raised by member firms in recent years. The discussion acknowledged the imperfections of the current sector and discussed a number of proposals to change definitions.

Subdivision by market capitalisation / style
There have been calls for greater sub division by market capitalisation bias. Within the IMA universe there already exists a UK smaller companies sector which accommodates funds with a small cap bias and mid cap investment constraints are only mandated for relatively few funds. As a large proportion of funds view allocation between large, mid and small cap companies as a key source of added value, it would be likely that the majority of funds would shun the parameters of separate sub sectors in favour of remaining in the general sector in order to exploit returns which accrue to different size companies across the investment cycle.

This is equally true for sub categorisation on a style basis. In the case of ‘Growth’ and ‘Value’ style funds, it would be difficult to monitor the adherence of such funds to their ‘style’ as many managers want to be able to actively manage investments in either ‘style’ depending on the perceived risk/reward at any given point and would therefore swing between ‘Growth’ and ‘Value’.

Additionally sectors based on capitalisation and style may create the problem of funds moving between sectors and the attendant issues surrounding restrictions on taking performance track records in these instances.

Subdivision by ‘Tracker’ and ‘Ethical’
Another common request has been to take tracker funds and ethical funds out of the sector. It is important to realise that in a sector that has 329 funds, taking out the 39 tracker funds and 19 ethical funds will not significantly reduce the number of funds. Tracker and ethical funds are also currently flagged across all sectors and so to identify them within larger sectors is quite simple. It was also agreed that there is no reason why their performance should not be compared with a wide range of UK Equity funds.

Focussed funds
The suggestion that focussed or concentrated funds should be broken out from more diversified funds was also reviewed. This suggestion has been based on equating risk with portfolio concentration. It was felt that, whilst concentration can lead to higher active risk, other elements e.g. high small cap exposure, can have a similar effect. In fact, most investment funds hold a sufficient number of securities to be well diversified if they choose to be. On number of securities alone, a 30 share portfolio can deliver most of the risk reduction required by investors.

Funds of funds
The committee felt that there would be insufficient funds willing to move from the general sector into one favouring funds of funds. There are currently 10 flagged funds of funds in the UK All Companies sector and funds of funds across all sectors are clearly flagged and are therefore easy to identify.

Conclusion
It is useful to point out that IMA’s sectors exist for use by consumers and advisers, who can already, if desired, subdivide the UK All Companies sector along selected lines. IMA’s find a fund facility on the Association’s website allows users to select a range of sub categories across all sectors.

Taking all of the above into consideration the PCRC concluded that there is currently insufficient argument for splitting the UK All Companies sector, and it does not, therefore, propose to recommend any change to the existing sector as many of the proposals raised contained at least as many flaws as the existing classification.

-Ends-

Notes to Editors:
1. The Performance Category Review Committee (PCRC) is a committee facilitated by the Investment Management Association and comprises a number of representatives from IMA member firms. The terms of reference for the Committee lay out the framework from which the committee operates. IMA sector classification which is overseen by the PCRC is aimed at the needs of potential and actual buyers of funds as customers have a legitimate desire to be able to compare funds like for like. The primary purpose of the IMA/PCRC’s approach to sector classification is to provide groups of similar funds whose performance can be fairly compared by consumers and their advisers. Sector philosophy is therefore founded on asset based criteria.

For further information, please contact:
Helen Stephenson, Communications Officer, IMA, 020 7831 0898