The Investment Funds Standards Committee (IFSC) has completed its first major overhaul of its fund categories.
The IFSC, which is made up of representatives of suppliers of investment fund data in print and electronic form, initially set up its fund categories two years ago in response to demands from the financial services industry.
Rob Bell, past chairman of the committee and senior vice president of Morningstar Canada, says the IFSC planned to review the fund categories on an annual basis and make alterations as needed. However the review process has taken longer than expected.
This most recent review takes into account the abundance of new funds have come into the market over the past two years. Many of these were specialty funds and did not fit into existing categories. From the outset the IFSC had meant to look at creating new fund categories if there were more than 12-13 funds with similar objectives.
As a result of the overhaul, the IFSC has now added four new categories.
Health Care will have 127 funds, with most of them moving over from Science & Technology group.
Financial Services will have 52 funds.
Canadian Small Capitilization will have 172 funds, with most of them moving from the Small to Mid Cap category, which has been eliminated. Funds not moved to the small cap group will be shifted to Canadian Equity.
The Alternative Strategies category will have 33 funds initially, with the majority of them moving from the specialty/miscellaneous group. The Alternative Strategies category will encompass “specialty funds, often referred to as hedge funds, which employ alternative strategies such as short-selling, leveraging, program trading, swaps and arbitrage,” according to the IFSC.
Further, “a fund need not employ all of these tools all of the time; it must merely have them at its disposal. Funds may employ speculative strategies as well as hedging strategies.”
The IFSC has made other changes including renaming Canadian High Income category to Canadian Income Trusts and Foreign Money Market category to U.S. Money Market. Country-specific funds will be moved to the Specialty/Miscellaneous group.
The changes take effect with the release of the September 2001 data.
Bell says another issue that needs to be addressed by the committee is the concept of clone funds. Many times a fund will be a top quartile performer and subsequently its clone (and there may be two or more) will show up with near identical rankings and performance.
This double and triple counting of the same basic fund performance skews fund category averages. As well, some assets are double counted because the clone fund holds a certain amount of the underlying fund. Subsequently quartile rankings are affected because the fund is counted more than once in each quartile.