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Does the name matter when you’re picking an investment?

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If you chose a ‘cautious’ investment would you expect to have up to 60% of your funds invested in risky shares? Probably not, which is why the names are changing – the problem is, the new names aren’t any clearer.

A storm’s been brewing in the investment industry over the past month. It surrounds the Investment Management Association (IMA) and its proposals to change the names of some of its investment sectors.

A few sectors have attracted a whole lot of criticism over the past few years – the IMA’s ‘managed’ sectors. These house funds that invest in a mix of assets – shares, bonds, property, commodities – funds that give you a ready-made, diversified portfolio of investments wrapped up into one shell.

Cautious by name, but not by nature

At present, the managed sectors are referred to as cautious, balanced and active. The cautious sector restricts investment in shares (the riskiest investment) to 60% and requires a minimum of 30% in bonds (lower risk than shares). Funds in the balanced sector can have up to 85% in shares, while the active sector allows up to 100% in share investment.

But the problem is, the way the IMA interprets as cautious isn’t the same as investors.

Which? research into consumers who call themselves cautious found that they want to preserve the value of their money when they invest – they’re not comfortable putting much at risk. But in this sector, funds can place over half – HALF! – of your money in the riskiest investment.

Similarly, what does ‘balance’ suggest to you? 50/50? But the balanced sector can invest almost all of your money in equities. It just didn’t seem to make any sense.

IMA changes are a let down

So, when the IMA said it was reviewing the sector names, we were cheered. But its proposal for changes left us hugely disappointed – it wants to change the sector names to A, B, and C. So the active sector becomes ‘Managed A’; balanced becomes ‘Managed B’; and cautious becomes ‘Managed C’.

In my view, this only makes things worse. Sector names act as a great signpost for people to sift through the thousands of investment funds out there – this tells investors nothing about the sector at all. Instead of using this opportunity for change to help make investing more transparent, it adds an ever greyer cloud. It doesn’t solve the initial problem, it simply side-steps it.

The IMA wants it just that way – for investors to go further and carry out more research beyond just looking at the sector name and picking any old fund from it. Of course, you should look carefully before putting any of your money at risk but why not give consumers a helping hand instead of a blindfold over their eyes?

And, despite the sector name changes, the actual funds won’t have to change their name. Currently, around 30% of the Managed C sector are funds with the word ‘cautious’ in them.

Do you care about the name?

So, are sector names important to you or is there more to it than the name of the fund? What would you prefer sectors to be called?

I’ll give you a springboard – the Association of British Insurers calls its mixed asset sectors “Mixed Investment – 60% to 100% Shares”. Is this any better? Let us know your views and I’ll incorporate them into our response to the IMA’s proposals.