Fees, holdings, clearer statements of investment objectives, manager names and manager ownership of their own funds are among the areas where we in financial services can better serve those who count on us to steward their savings.
The issue I’d like to highlight here is not as weighty as some of the preceding, but it is important and there should be an easy solution that will bring more clarity to the investing public and their advisers.
The problem is one that is about to grow considerably worse here in the UK, as firms react to the Retail Distribution Review (RDR) and add classes with differing levels of trail commission: Share class proliferation and the lack of standardised class designations.
Indeed, some funds tracked by Morningstar already have well north of 40 share classes. Such classes can differ in currency denominations, currency hedging policies, duration hedging policies, fee-levels, minimum investments and the accumulation or distribution of income. Because of this, their performance can vary dramatically. To make matters more complex, there are even "virtual" share classes (don't ask).
That the nomenclature for share classes with similar traits varies from firm to firm is decidedly unhelpful. "B" shares at one firm might be retail and carry a relatively high fee, while at another, "B" shares might be institutional and carry a low fee but a very high minimum investment. Others may use numerical designations or a combination of letters and numbers.
To resolve this, what is needed is to develop a standard nomenclature for each relevant area of difference between classes.
The axes of differences that need to be accounted for are, broadly: intended investor audience, fee structure, distributing status, hedging policy and base currency. These could be addressed through an approach such as the following:
To designate intended audience, standardise on indicative letters such as the following: R=Retail, I=Institutional, L=Limited (e.g. private bank clients, qualified investors, etc.)
For Fee structure, use NT to indicate No Trail Commission, or T+ basis points to indicate the trail commission, e.g. T25, T50, etc. For base currency, use the three letter ISO currency code, and prefix this with H if the class hedged to that currency. For duration hedged class, use DH.
Taken together, such a nomenclature would give rise to class indicators such as the following:
Of course, the designators need not be the above, and there may be more or less specificity needed, but standardisation of nomenclature would greatly improve the ability of investors and advisers to better compare like-for-like classes of funds and ensure they understand the key traits of each class from a quick scan of a fund's name.
That's also greatly to the benefit of asset managers: it should cut down on inquiries and dramatically increase the odds that investors and advisers will identify and buy the share class that best fits their needs. With the onset of a wave of new RDR-spawned share classes, it's a particularly good time to address this issue. We hope the industry doesn't let the chance pass it by.
Christopher Traulsen is director of fund research Europe and Asia at Morningstar. This Morningstar article first appeared on FTAdviser.
