EFAMA launches new fund categorization system

23 June 2008

The new classification 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 new classification 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 European Fund Classification (EFC) for investment fund is intended to cope with the growth of evolving fund strategies by categorises funds based on their underlying portfolio structure and holdings.

 

According to the new classification, each fund is assigned one of four categories according to the assets in which the fund invests:

• Equity: an equity fund should invest at least 85 percent of its assets in stocks.
• Bond: a bond fund should invest at least 90 percent in fixed income transferable securities. No exposure to equity is allowed.
• Money market: money market funds are categorized along duration (from an average maturity of 60 days until a weighted average modified duration of one year maximum) and investment possibility (from investment grade money market instruments to transferable debt instruments).
• Mixed: a mixed fund invests in stocks, bonds and cash.

 

 

Another 11 types of funds fall outside the four broad categories, which are:

 

• Absolute return funds: Funds that are managed with the objective of generating a positive return over a cash benchmark, irrespective of market movements, and that are likely to make extensive use of derivatives to short/long securities or the market as a whole.
• Total return funds: Funds that seek to maximize total investment return relative to a benchmark (typically over periods of more than 12 months) by participating in rising stock and bond markets and minimizing risks in declining markets.
• Convertibles: Funds that invest at least 70% in convertible bonds and primarily equity linked notes, with less than 30% exposure to primarily equity linked notes.
• Open-ended real estate funds: Funds that are regulated at national level by fund-specific regulation and that:

Ø       are redeemable at certain moments at the request of unit/ shareholder

Ø       are allowed to invest directly or indirectly through participations in real estates and/ or in shares/ units of other open ended real estate funds

Ø       comply among others with well-defined rules concerning risk diversification, net asset value calculation and subscription and redemption rules.

• Closed-ended real estate funds: Funds - listed or not - that are regulated at national level, not necessarily by fund-specific regulation and that:

Ø       have a fixed number of shares outstanding,

Ø       are allowed to invest directly or indirectly through participations in real estates.

• REITS: Companies listed or not - that are regulated at national level by specific regulation and that

Ø             aim at buying, selling and managing real estate (directly or indirectly),

Ø             have a special tax status.

• Guaranteed funds: Funds that offer a formal, legally binding guarantee (of income or capital).
• Capital protected funds: Funds that are designed to protect from the full volatility of markets.
• Lifecycle/Target Maturity: Funds that are managed toward significant withdrawals approaching a target date, with asset allocation becoming more defensive approaching the date.
• Asset-backed securities: Funds that are investing at least 80% of the assets in financial securities backed by pools of underlying assets such as loans or other receivable, including leases, credit card debts and companies’ receivables, will be categorized as ABS funds.
• Commodities funds: Funds that are investing in commodities and commodity futures and options.

 

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