EUROPE - The European Fund and Asset Management Association (EFAMA) has unveiled a new classification for investment fund which it hopes will cope with the growth of evolving fund strategies by categorises funds based on their underlying portfolio structure and holdings.

The European Fund Classification (EFC) was unveiled today following three years of work with several major players in the asset management sector, as well as associations and data providers, to unveil what officials hope will correctly place funds in classifications matching their true definition.

More specifically, four main categories - equities, fixed income, money market and ‘mixed' - of asset types have been established while a further 11 categories are listed separately to label funds considered as:

Absolute return funds: generating a positive return over a cash benchmark, and likely to use long-short derivatives; Total return funds: maximising total return relative to a benchmark by participating in rising equity and fixed income markets; Convertibles: at least 70% invested in convertible bonds, less than 30% exposed to primarily equity-linked notes; Open-ended real estate funds(OEREF): regulated at national-level, redeemable at the request of unit/shareholder, and investing directly/indirectly in real estate, shares, units and other OEREFs; Closed-ended real estate funds; Real estate investment trust companies (REITS) - listed or not - with a special tax status; Guaranteed funds: have a formal, legally-binding guarantee; Capital protected funds: protect from full volatility of markets; Lifecycle/target maturity funds: asset allocation becomes more defensive as target date approaches; Asset-backed securities: at least 80% of assets backed by loans and receivables, leases, credit card debts, and Commodities funds: - investing in commodities, commodity futures and options.

Fund were previously forced into labels into wider, generic classifications which made it increasingly difficult for consumers and investors to compare fund performance, in part because many of the new ideas such as absolute return funds and shorted investment strategies, did not fit these classifications and therefore had to be defined as ‘unconstrained' or unclassified.

At the same time, the huge array of data services in the market means there are different interpretations of fund classifications and labels.

Under the new system, equity funds should invest at least 85% of its assets in listed stocks, while bond funds are constrained to investing at least 90% in fixed income, money market funds based on duration and ‘investment possibility' and mixed funds of stocks, bonds and cash.

Beyond this, the sectors drill down further to categorise funds into:

Country/region Sector Market cap Currency exposure Credit quality Interest rate exposure Emerging market exposure Asset allocation, and Structural characteristics (such as fund of funds, leverage, and ETFs)

The main aim of the new system is to open transparency of the funds so investors can analyse the performance of funds across borders and correctly identify the underlying strategy of the fund.

To achieve this, all of the firms involved have to submit their data on a quarterly basis to FundConnect, the classification administrator, who will look at the underlying assets and structures and ascertain whether it matches the fund classification label given by the fund manager, before giving it a specific labele.

The new system is not compulsory, but major fund houses have already signed up and begun feeding data to FundConnect.

EFAMA officials hope other companies will eventually follow suit, and the system will eventually be endorsed by individual investment management associations, as well as become adopted by the variety of data providers, according to Robert Higginbotham, chairman of the European Fund Categorisation Forum (EFCF).

"The single market for European funds has brought many benefit from investors, not least an expansion in the choice of products," said Higginbotham.

"But with growth in choice comes the risk of confusion: investors' inability to compare different products may lead them to select inappropriate products or deter them from investing entirely," he added.

The classification regime will be reviewed annually by the EFCF - a body of representatives from fund firms, associations and data providers - to ensure the regime keeps up with the changing market and delivery of funds.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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