Rodgers Investment Consulting - Article - MoneySense December/January 2002

This news is good news.

Kelly Rodgers, MoneySense December/January 2002

If you've ever scanned the mutual fund special sections in your newspaper, you've noticed the vast number of fund categories. There's 35, ranging from Canadian equity to precious metals to U.S. money market.

The profusion of categories might seem mind-boggling at first, but the divisions are intended to help investors. By slotting funds into appropriate classes, the categories make it easier for you to shop for the fund that best fits your portfolio. They allow you to compare the performance of a fund with that of its peers, and they let you assess the diversification of your portfolio.

But, until now, many fund categories were sloppy and a tad misleading. For example, the names of some categories bore little resemblance to the funds listed beneath them. Funds that had different specialties, such as health care and technology, were sometimes lumped together. As a result, performance comparisons were almost impossible. And to make matters worse, some mutual fund companies would list their funds in categories where they thought they could get the best quartile ranking, rather than in the category that best reflected the funds.

It was a mess. But I'm proud to say that the problems have been fixed. Why am I proud? Because I helped fix them.

In 1998, I co-founded the Investment Funds Standards Committee (IFSC) with a number of people involved in mutual fund data collection and performance measurement. Our mandate: review and overhaul all mutual fund categories so that they serve investors better.

Our task became more urgent as the mutual fund industry began changing at a rapid pace in the late 1990s. Since the founding of the IFSC, the number of funds that specialize in specific sectors has exploded. And the Canadian government has increased maximum foreign content levels for RRSP-eligible funds.

As funds change, so must fund categories. New categories had to be introduced and some existing ones had to be modified, I am particularly proud that these improvements were driven by the mutual fund industry, and not forced by regulators.

Here are a few of the new categories that should make mutual funds easier to understand and easier to buy.

ALTERNATIVE STRATEGIES By "alternative" we mean hedge funds. These funds, which use exotic strategies to profit even when stocks fall in value, used to be lumped into the specialty/miscellaneous category. That's because fund companies wanted this unusual type of mutual fund to mingle with more mainstream funds. We at the IFSC thought differently. Hedge funds should have their own category because they employ strategies, such as leveraging, that are not available to other mutual funds. Also, to make accurate comparisons between funds, you must be able to compare apples to apples.

HEALTH CARE Health-care mutual funds are totally unrelated to technology funds. Yet, until now, the two types of funds shared the science and technology category. This didn't make any sense, and it certainly made comparison shopping a difficult task. The solution: the IFSC carved out a separate health-care category. Now, making comparisons among funds should be a snap.

FINANCIAL SERVICES New funds spring up all the time, but funds that specialize in banks, insurance companies and investment firms are particularly popular these days. Problem was, these funds used to be lumped in with diversified equity funds, which are not limited to the shares of financial institutions. But no more. The IFSC has created a category devoted exclusively to funds that invest in the financial services sector, and we now compare like with like.

CANADIAN INCOME TRUST We used to have a category called Canadian high-income balanced. The name implied that the funds within this category field a blend of stocks and bonds. However, this wasn't the case. Over the past year, many of these so-called balanced funds reduced or eliminated their bond components. At the same time, they increased their exposure to income trusts, which are essentially stocks that make regular income payments to investors. As a result, we decided to do away with the Canadian high-income balanced category and create the Canadian income trust category.

If you would like information about additional fund categories and their recommended benchmarks, visit the IFSC's Web site at www.cifsc.com