Words fail me. I don’t know what to say. I can’t begin to express it. That was my reaction to this week’s announcement of new improved names for the Cautious Managed, Balanced Managed and Active Managed fund sectors. And, clearly, this was exactly the same affliction that gripped the committee of fund managers who were entrusted with devising the new names. Because they haven’t tried to express anything, their proposed solutions say nothing, and their words fail everyone.
Categorising funds into distinct sectors, and giving them names that accurately describe how they invest, is an essential service to investors. With 2,800 funds to chose from, we need to know where to start looking, and how to compare like with like. Fund sector names help us to do this.
UK Equity Income, for example, tells you what you are investing in, and to what end. Japanese Smaller Companies tells you exactly where your money is going. Cautious Managed and Balanced Managed, however, have proved less helpful definitions. As we have reported in FT Money, complaints from bemused investors who have made huge losses in cautious funds are now piling up, and a record regulatory fine has been imposed on one bank for failing to explain the downside of “cautious” and “balanced” products. Market research shows that neither investors nor advisers can correctly judge the risk of holding a “cautious” fund if it can be 60 per cent invested in equities.
So it was only right that the industry body for fund managers – the Investment Management Association (IMA) – instigated a review of these sector names (as well as the tautologically pointless Active Managed). A committee was convened in August 2010 to come up with clearer alternatives.
Now, if you had nine months to think of a name, you’d think you’d be able to come up with something sensible. After all, most parents manage it – and, if anything, the Pierses and Tobys of the fund management industry had more material to work with. Roget’s Thesaurus lists 79 synonyms or phrases for “caution”, plus another 63 for “absence of excitability”, while thesaurus.com suggests 51 alternative verbs for ‘manage’. As there are only 165 funds in the Cautious Managed sector, there seemed every chance that a combination of English words could be found to describe their modus operandi. Even more chance if you include Latin.
What, then, did the finest privately-educated minds in the City come up with?
I had to read the IMA press release twice to check I’d understood it correctly: “The Managed sectors will be renamed Managed A, Managed B and Managed C, with a new Managed D sector.” Those weren’t the actual, final, names that the IMA was going to use, were they? No, they couldn’t be – because, later in the announcement, the IMA said: “It is important that these sectors are properly understood by investors… The changes we have outlined are intended to bring about a better understanding of the sectors and how they fit together.”
What must have happened is that an unfinished, draft document – with Managed A, B, C and D typed in to leave space for the real names – got sent out by mistake. I asked one of my colleagues to phone the IMA and get the real sector names. It soon became apparent that we were wrong. Those really were the final names.
As I see it, there can be only three possible explanations for this nonsense. One, it was the only wording that a group of self-interested fund managers sitting in a room for nine months could agree on. Two, realising in advance that they would never agree on anything, they instead put a group of small children into a room for nine months with some alphabet blocks. Three, angered by months of criticism, they decided: “Stuff you, private investors – if you want to know what these funds invest in, do your own research”. I suspect there is some truth to scenarios one and three (but not to scenario two – my seven-month old has already arranged his alphabet blocks into better sector names, and he can’t spell).
Even fund managers are embarrassed. Fidelity said the decision was “perverse” and “retrograde”. Skandia called it “a farce”. What’s particularly ludicrous is the fact that the pensions industry body – the Association of British Insurers (ABI) – came up with a simple replacement for its Cautious sector name in a matter of weeks – “Mixed Investment: 20-60 per cent shares” – thus ensuring that those saving for retirement know what they’re investing in, if not what they’ll get. But the IMA rejected harmonising its sector names with the ABI’s, claiming it did not have “sufficient time”.
If it doesn’t make time to rethink its infantile ABC, it’s time for the Financial Services Authority to knock some heads together. Fund investors deserve plain speaking, not being left lost for words.