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FUND CLASSIFICATION MYSTERY
3/28/2017 11:19:31 PM
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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert



By Robyn K. Thompson  | Friday, November 25, 2016


Q – I’m a little confused about the definitions of various fund categories. I was researching fixed-income funds to add to my portfolio as defensive hedges against market volatility. I looked at CIBC Monthly Income Fund Class A, thinking it was a bond fund, but discovered that it is actually categorized as a Canadian Neutral Balanced fund, which can include equity holdings. Could you explain how funds are categorized and how to tell whether a fund is a true fixed-income fund? – Marilyn C., Richmond, B.C.

A – Until the late 1990s, there had been no standard method of fund categorization. Fund classification was a hodge-podge of competing methods and processes developed independently by Canada’s larger media and data companies. But that changed with the proliferation of mutual funds in the late 1990s, as industry and consumer demand for a uniform method of fund classification resulted in the formation of the Canadian Investment Funds Standards Committee (CIFSC).

Formed in 1998, CIFSC consists of Canada’s major investment fund research and database firms and has a mandate to standardize and maintain the classifications of Canadian-domiciled retail investment funds. Key voting committee members include Fundata Canada, Morningstar Canada, CANNEX Financial Exchanges, and Thomson/Reuters Lipper. Non-voting members include the Investment Funds Institute of Canada, Canadian Life and Health Insurance Association, Canadian ETF Association, as well as independent members.

Voting membership is equal so that no voting member has more influence than any other member, thus ensuring that fund categorization is kept objective and impartial. CIFSC continually reviews fund categories, and invites comments from all investment fund industry participants. While fund managers and distributors are not permitted to be direct members of the Committee, their input is received through membership of their representative trade associations.

Funds are branded, named, and sold by individual fund companies, which do their best to describe the nature of the fund in the name. However, it’s important to note that a fund’s name does not necessarily describe the CIFSC category to which it belongs. This is not because the fund companies are trying to pull the wool over your eyes; it’s more to do with what the fund company sees as the mandate of its fund.

So in the case of the CIBC Monthly Income Fund, for example, in its fact sheet for the fund, CIBC says the fund’s mandate is “To provide a reasonably consistent level of monthly income while attempting to preserve capital by investing primarily in a diversified portfolio of debt and equity instruments located throughout the world.” You’ll note that the fund may invest in both debt and equity instruments. For purposes of CIFSC’s fund classification, this puts it squarely in the “Balanced” fund category. But because of the nature of the fund’s holdings, it is further sub-classified into the “Canadian Neutral Balanced” category.

CIFSC restricts the Canadian Neutral Balanced category to funds that invest at least 70% of total assets in a combination of Canadian equities and Canadian dollar-denominated fixed-income securities. In addition, such funds must invest between 40% and 60% of their assets in equity securities. As of Oct. 31, the CIBC fund had allocated about 51% to equities and 44% to fixed income, confirming its position in the Canadian Neutral Balanced category.

Funds in the various Fixed Income categories are typically defined as those that have most (90%) assets allocated to fixed-income (i.e., bond) holdings. You’ll generally find the fund category shown in a fund’s fact sheet and in the detailed listings of one of the fund data services.

Fund classification is important for portfolio asset allocation and re-balancing purposes, especially where portfolios invest most or all their assets in various types of funds. – Robyn

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

© 2016 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

 
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