An investment sector reshuffle

The fund performance league tables have gained over 530 new funds since April. 

In the middle of April, the trade body of investment managers, the Investment Association, made a radical revamp to its fund sectors. As a result, many of the investment performance league tables have been changed subtly, even though the performance of the individual constituents is unaltered. The reform had two elements.

Addition of exchange traded funds  

Until the change, the Investment Association’s 39 investment sectors all contained two main types of fund:

  • the traditional unit trusts; and 
  • more recently created open ended investment companies (OEICs). 

To most investors, the two types looked virtually identical and over the years many unit trusts have converted to OEICs. A major feature of both is that the prices at which units/shares are purchased or sold by investors is calculated by the fund manager, based directly on the value of the underlying assets.

The Investment Association has added a third fund to this duo – exchange traded funds (ETFs), which are an increasingly common structure. ETFs are investment companies, similar in many ways to OEICs, but traded on the stock exchange. As a result, it is the market which sets the prices of ETFs, not those managing the funds. Managing is perhaps a generous word, as most ETFs are index funds, mirroring the constituents of a market index, such as the FTSE 100 or the S&P 500. Their structure is such that the number of shares in an ETF can expand and contract, depending upon demand, a factor that distinguishes them from investment trusts. 

New sectors 

The arrival of so many ETFs prompted the Investment Association to revise its Global Bonds sector, which would otherwise have had 125 new entrants. That sector has now been fragmented into 14 new bond sectors covering every niche from Global Inflation Linked Bonds to EUR High Yield.

Two Investment Association sectors, Specialist and Global, both had more than 70 new ETF entrants. In total, the Investment Association added over 530 ETFs to its sector listings. The new arrivals mean that funds can change their performance ranking merely because the sector size has been swollen by the influx. 

More than ever, seeking advice is important when choosing from what are now over 4,100 funds spread across 52 sectors. 

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.