Fund trade body the Investment Association (IA) decided to close the IA Japanese Smaller Companies sector in September as the number of its constituents had fallen to eight.
The IA regularly reviews its existing sectors, with the IA’s sector committee requiring a sector to have at least 10 constituents to justify its existence. The only exceptions to this rule are the IA Short Term Money Market and the IA Standard Money Market sectors, which respectively host seven and four funds, due to regulatory reasons.
Yet, Sheridan Admans, head of fund selection at TILLIT, believes it is “short-sighted” to consider a sector no longer viable because its constituents drop to just eight. He stressed there is a need to enhance discovery for users.
He said: “If the IA's mission is to advocate for UK investment management and support British savers, investors and businesses, the inclusion of sectors should be broader, even if those member funds are smaller in number to help investors navigate the vast array of available funds.”
Admans suggested lowering the minimum number required for a sector to be considered viable and introducing more sectors as it would improve navigation and enable investors to make comparisons and better-informed decisions.
He added: “This could involve breaking down or even doing away with large sectors such as IA Specialist, which currently has 247 member funds, or IA Unclassified, which has over 900 member funds.”
Rob Morgan, chief analyst at Charles Stanley, suggested splitting the IA UK All Companies sector where there are nearly 200 products.
He said: “Here, a division by market capitalisation would seem sensible to separate out any primarily mid- and small-cap mandates, including FTSE 250 trackers.”
Another sector Morgan suggested splitting is IA Asia ex-Japan. For instance, the IA could separate funds focused on developed Asia from those where there is a significant amount of emerging market exposure.
Alternatively, Morgan believes that an Asian Income sector could be worthwhile, as those strategies are markedly different. He added: “There is probably not quite enough funds to justify it, which is why they are all lumped together.”
Yet, Jason Hollands, managing director at Bestinvest, does not see any pressing necessity for the IA to revamp its sectors.
He said: “I don’t pay a great deal of attention to the IA sectors as we assess funds against their market benchmarks (typically using the relevant MSCI indices) rather than sector averages. With around 50 sectors, it’s hard to think of any glaring holes.”