The forthcoming sector change

First State Investments has announced that the First State Global Emerging Markets Leaders fund will be re-categorised within the IMA Specialist sector from 1^st December 2014.  Hitherto, the fund has been categorised within the IMA Global Emerging Markets sector.  Following this announcement, the fund remains on our Established list.

This change reflects the fact that the fund has been struggling to meet the IMA Global Emerging Markets sector requirement that it hold at least 80% in equities listed within emerging market countries.  Whilst it is important that investors understand that the fund often incorporates exposures to cash and companies listed in developed markets, we emphasise that the move does not reflect any change in investment process from the team.

The fund is managed in a highly distinctive style and it is this unconstrained, benchmark-agnostic approach that has led it to fall outside of the IMA sector guidelines.  The team’s absolute return mindset and willingness to consider any companies with significant operations in emerging markets result in a risk and return outcome that is very different from mainstream benchmarks or fund offerings.

Within this context, we have not altered our view that this is an attractive fund for certain, long-term investors who are comfortable with this approach to investing in emerging market equities.

Other examples from different sectors

This is one of a handful of large, established funds that have made IMA sector decisions (forced or unforced) that may seem unusual in order to preserve the investment philosophy and process through which they have become successful.  For example, the M&G Global Dividend fund did not move into the IMA Global Equity Income sector when it was created in 2011, as the manager wanted to retain greater flexibility than the sector’s yield requirement might allow.  The fund is featured on our Recommended List.  For similar reasons, a number of funds have been re-categorised from the IMA UK Equity Income sector to the IMA UK All Companies sector over recent years as they fail to consistently meet the income requirement.  This includes the widely-owned Invesco Perpetual High Income and Invesco Perpetual Income funds.

It is, of course, entirely appropriate that the IMA polices its sectors properly to ensure that all funds meet the stated requirements.  On behalf of investors in funds that are moving from one sector to another, it is important to understand whether or not a sector change represents a change in investment policy and therefore whether it raises a question about client suitability.

The Adviser Centre - IMA Sector Overviews

We will continue to feature the fund in our IMA Global Emerging Markets Sector Overview given its importance to our clients and its relevance to this competitive landscape.

As a general reminder, for your information and convenience, we include the IMA’s stated sector definitions within this section of the website.