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Standards set for fund categories


The Investment Funds Standards Committee, which represents all major distributors of mutual fund performance data, has reached a groundbreaking agreement to standardize fund categories.

The accord is intended to provide clearer information on performance rankings and to eliminate the jockeying for marketing advantage that has frequently occurred as a result of funds being placed in categories to which they do not belong. For instance, the committee imposed diversification criteria to prevent funds that are heavily invested in a single industry sector from comparing themselves to diversified funds.

The committee, whose members include major news media organizations such as Southam and Thomson, the owner of this newsletter, and specialty data publishers BellCharts and Portfolio Analytics, was formed in January. Also participating in the discussions was the Investment Funds Institute of Canada (IFIC), the trade group for the fund industry.

The results of the committee's work address long-standing concerns of information providers and industry regulators. After months of discussion, the committee came up with 31 standard categories. Membership in each of the categories was based on the funds' portfolio holdings, as well as their stated objectives. A Canadian equity fund, for instance, was defined as one that held at least 75 percent of its assets in Canadian stocks listed on a recognized exchange.

One problem raised about the holdings- based approach in the committee's discussions was that at any one time, a fund might not meet the strict holdings criteria established by the committee. The committee addressed this issue by basing the portfolio criteria on median holdings over a three-year period. New funds will be classified according to their investment objectives as stated in their prospectuses.

The committee's recommended categories have been circulated to fund companies, banks, insurance companies, brokerages and other providers of investment fund products for comment. Recipients of the committee's 50-page report have been asked to comment on the new categories in general, and on whether they agree with the classification of the funds they sponsor.

So far, the response has been mostly positive. Many people feel the standards are long past due, said Rob Bell, president of BellCharts.

Once in use, standard industry categories will have a significant impact on advertising by fund companies of their investment performance. Until now, companies could select from the performance rankings published by competing media outlets and advertise the rankings that put them in the most favorable light while conveniently overlooking others.

There are 21 groups of equity funds in the new categories. The largest single major category, Canadian equity funds, has been subdivided into three new categories- diversified, large-cap and small to mid-cap. The U.S. equity category has been divided into diversified and small to mid-cap.

Among more internationally diversified funds, there are separate categories for funds including and excluding North America. The committee also made distinctions between funds that invest throughout Asia, Japan-only funds, and funds that invest anywhere in Asia except Japan. There are also country-specific categories.

For balanced funds, the committee differentiated between domestic funds that always stay balanced and asset allocation funds whose asset mix can vary widely.

The committee also established an entirely new category-balanced high income funds, which include funds that invest largely in real estate income trusts, royalty trusts and other income trusts. The new standard categories are intended as a basic framework for data providers, who will still be able to create additional sub-categories.