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We are certainly spoiled for choice when it comes to investment funds. At the last count there were more than 4,000 available to UK investors. So, how do you know which to pick? What are the aims and objectives of different portfolios? Is it easy to compare like-with-like?
Unfortunately, the sheer number of funds available – as well as the fact their names can often be rather obscure – can make this a challenge. The good news is that the Investment Association (IA), an industry trade body, classifies funds into various sectors to help demystify the process.
Here we give an insight into how these sectors are organised and why this information is useful for investors deciding where to put their money.
The IA puts funds into more than 50 sectors. The idea is to help investors narrow down the large fund universe into more manageable chunks.
Each sector has a clear definition setting out the criteria a fund must fulfil. This enables investors to quickly establish which funds will best meet their needs. For example, if they’re looking to invest in UK equities, they can focus on those in a particular sector. They can also compare the performance of similar funds over various time horizons.
The IA’s sectors committee oversees all classifications. It guides fund providers, data companies and other interested parties on various sector-related issues.
According to the IA, funds are broadly split between income and capital growth. “We then classify these by asset type, region or industry sector they invest in,” it added.
There are funds targeting capital protection; fixed income; equities; mixed asset; specialist; portfolios targeting an outcome, and those that are unclassified.
As well as definitions based on the assets bought – such as equities and fixed income – funds are also divided up by their geographic focus.
In addition, some portfolios are classified by their overall strategy, while there’s also a ‘Specialist’ area that has a broader remit and is home to many funds with varying objectives.
A sector monitoring process is in place which involves analysing portfolio holdings to check each one meets the specific requirements of the sector to which it belongs.
The IA also publishes monthly data showing funds under management in different sectors and how those figures have changed over different time periods.
It also charts net retail sales of funds by asset class, as well as detailing the best and worst selling sectors on a monthly, quarterly, and annual basis.
The IA figures cover sales of funds of funds, tracker portfolios, and those focused on responsible investing. In addition, you can look at past data going back a number of years.
This information is useful for would-be investors as it shows which sectors are being bought and which are losing popularity.
While you shouldn’t base your investment decisions on where someone else favours, it’s all useful data that can be factored into your thinking.
Assets under management held by Investment Association members hit £10trn in 2021, according to the most recent IA Investment Management Survey*. The data also revealed how the UK was becoming increasingly attractive for overseas investors, with £4.6trn of assets being managed for overseas clients – 46% of the overall total*.
As far as sectors are concerned, IA Global is by far the most popular with £166.4bn under management, according to the most recent data**. It’s followed by IA UK All Companies with £141.1bn, IA North America on £82.1bn, IA Mixed Investment 40-85% shares with 81.7bn, and the 58.2bn in IA Europe excluding UK**.
The IA outlines the definitions for all the sectors. It defines where funds can invest their assets and their overall performance objectives.
Although funds may be in the same sector, however, their aims and objectives may still differ. That’s why it’s vital to carry out your own analysis on portfolios.
Fund providers usually publish monthly factsheets detailing the latest information on a portfolio’s overall positioning. The fund’s manager will also give monthly and quarterly updates on their performance, along with how they see the outlook.
You need to combine this information with independent data and views on portfolios and their managers, such as that available on the FundCalibre platform.
There are options for income and growth-oriented investors. For example, IA UK Equity Income is for funds that invest at least 80% of their assets in UK equities, while IA Global Equity Income sectors has the same amount in international equities.
Then there are sectors that principally target growth. They’re also divided up into UK equities – IA UK All Companies and IA UK Smaller Companies – and overseas equities. The regional equity portfolios give you exposure to a wide variety, including China, Europe, Asia Pacific, and North America. Some focus on smaller companies; others on larger capitalisation stocks.
There are plenty of sectors catering for fixed income investors. Whether you want UK or international products, there are options available. For example, there are those investing in UK Gilts, UK Corporate Bonds, US Government bonds, and Global Mixed Bonds. There are also strategic bond funds whose managers have a greater degree of flexibility to invest across the fixed interest spectrum.
There are also IA Mixed Investment sectors that give investors more clarity as to the amount of equity exposure they’re embracing. Each of the four available sectors will dictate the minimum – and maximum – limits that funds must have to qualify for inclusion. They are IA Mixed Investment 0-35% shares, IA Mixed Investment 20-60% shares, IA Mixed Investment 40-85%, shares and IA Mixed Investment Flexible, which has no restrictions.
*Source: The Investment Association, September 2022
**Source: The Investment Association, May 2023
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