EUROPE: EFAMA launches new fund categorisation

Monday June 23 2008

EFAMA in its efforts to address the concerns that product development had outpaced the development of fund categorisation, resulting in too broad classification sectors; has launched a new industry initiative to bring greater transparency to fund categorisation across Europe with the support of leading cross-border fund management associations, data vendors and national associations.

The European Fund Classification (EFC) aims to improve choice for pan-European fund distributors and their clients through a set of new standards designed to facilitate easy comparison of funds across the most popular investment sectors.

The EFC has been developed by the European Fund Categorization Forum (EFCF) – an EFAMA working group made up of representatives from some of Europe’s largest asset managers, data providers and national associations.

As an overview, the EFCF Fund Classification assigns Each fund to one of four categories according to the assets in which the fund invests. The Categories are namely Equity, Bond, Money Market and a Mixed category investing in stocks, bonds and cash.

In addition to these four broad categories, the EFCF has also classified the following fund types that are not managed in relation with a specific asset class. The Fund Types are: Absolute return, Total return, Convertibles, Open-ended real estate, Closed-ended real estate, REITS (Real Estate Investment Trust), Guaranteed, Capital protected, Lifecycle/Target Maturity, and Asset-backed securities.

The EFCF will also undertake to assess whether new categories should be added to better cover funds types that are fully exploiting the investment possibilities conferred by UCITS III.

EFAMA and the EFCF have also established a “classification administrator” to police the new standards by monitoring compliance at portfolio level. An important aim of the EFC is to ensure that investors know exactly what the holdings in the fund are when they invest in a compliant fund.

From the perspective of the European fund industry, adoption of the EFC should bring less controversy in sector/peer group classification. Hence, fund providers will have to spend less time in bilateral discussions with data vendors to clarify definitional issues. Moreover, the classification offers a “common language” so that discussions between data vendors and asset managers should become more efficient.

Robert Higginbotham, President Europe for Fidelity International and Chairman of the EFCF acknowledged the benefits to investors brought by the single market for European Funds and noted the importance of the new Fund Classification system by saying:

“… This is why the new European Fund Classification is so important. Built on common principles shared by the industry and unaffected by any particular commercial interest, the ECF is a vital tool for distributors, advisers and their clients in the selection of funds. It also represents an opportunity for the fund industry to show that it can act in ways that enhance the customer’s understanding of investments – and so grow the market overall.”