IFAs and investors had criticised the old Managed sectors, saying their titles were misleading. The IMA responded by renaming them based on the proportion of holdings their funds had invested in equity.
However, Allianz Global Investors says that the new Mixed Investment 0%-35% Shares, 20%-60% Shares, 40%-85% Shares and Flexible Investment sectors still don't accurately express the level of risk that investors are taking on.
"Whilst we applaud the IMA and the ABI for the consultation and consumer research carried out prior to the launch of the new 'Mixed' sectors, we believe that this area needs to be revisited," commented Nick Smith, managing director at AllianzGI.
"It is becoming clear that the sector names in their current format are failing to provide the signpost that investors and their advisers need."
The concerns are based around research that indicates funds grouped together under the new names have very different levels of volatility.
Data from FE Analytics shows that the least volatile fund in the new Mixed Investment 20-60% Shares sector – IM Matterley Regular High Income – has an annualised volatility of 3.84 per cent over three years while the most volatile fund – Invesco Perpetual European High Income – has a score of 13.71 per cent.
When the volatility profiles of all the funds from the new sectors are combined, many funds have very similar levels of volatility, despite being in different sectors. For instance, many funds in the Mixed Investment 20-60% Shares sector are as volatile as those in the Flexible Investment sector, which can hold up to 100 per cent in equities.
Source: Allianz Global Investors
Smith added: "We would suggest a completely new industry approach, with funds allocated to sectors based on volatility outcomes rather than their asset mix. This would provide much greater clarity for investors and advisers; that is to say the outcome that an investor can expect from the fund."
"Investors are increasingly looking for more predictability about the risk they are taking and therefore there is growing demand for outcome-orientated solutions. Similarly, advisers are looking for help to make their job easier for them, especially as RDR approaches."
"Focusing on a multi-asset fund’s expected volatility makes for an easier conversation with a client than talking about asset mixes. Our research suggests that advisers are increasingly disregarding IMA sectors when selecting funds, as they do not feel that they add any value in their current format."
However, Rob Morgan, investment analyst at Hargreaves Lansdown, believes that using volatility as a reference point is problematic.
"Volatility only tells you what a fund has done historically," he said. "Some managers such as Martin Gray at MAM have been very bearish but are prepared to up the ante and take on a lot more risk as and when the environment improves. If you want your manager to take these timing decisions for you then volatility is not a good differentiator."
"The key is to get underneath the bonnet of the fund and see what the nuts and bolts are. The sector should only be used as a guideline and you shouldn’t take a broad-brush approach. Get to know the manager’s strategy and which markets they are likely to outperform in."