Another fund category overhaul

Brace yourselves. The grand potentates of the mutual fund world are about to re-organize the various categories yet again. It was announced last month that Morningstar Canada and the Canadian Investment Funds Standards Committee (CIFSC) have agreed to resolve their differences and negotiate a new set of fund categories that will apply to the entire industry.

The two groups went their separate ways last year, with each using its own methodology for determining where funds should be slotted. The result has left investors confused and created something of a dog’s breakfast when it comes to comparing performances.

Recently it was announced that the two organizations have agreed to kiss and make up. Talks are under way to arrive at a revised category list that both can live with. While I welcome the return to unified categorization, I’m afraid that what we get will not be much of an improvement over the unsatisfactory method we now have. Both the CIFSC and Morningstar lists leave a lot to be desired and in some cases are devoid of plain common sense.

For example, the CIFSC categories, which are the standard for everyone in the industry except Morningstar, has four different categories with the word “income” in the title. Not one of these, however, covers the burgeoning group of global income funds. Morningstar has eight categories with the word. Morningstar also has eight categories that have the word “hedge” somewhere in the name, some of which contain as few as four funds. What is the ordinary investor supposed to make of all this?

Morningstar says that the revised categorization plan will drop Canadian Income Trusts as a separate group. Given the likelihood that there will be no pure income trusts funds by 2011, that’s a sensible idea. But that’s one of the few positive things that I could find in the general statement of principles that Morningstar published. So let me put in my two cents worth. Here are three new categories I would like to see that I think would make life easier for the beleaguered investor.

Canadian income funds. There are hundreds of these, including income trusts funds. But in both categorizations they are spread over several groupings. Why not simplify matters by putting them together and restricting inclusion to funds that pay distributions no less than quarterly and that meet pre-determined minimum payment standards?

Global income funds. This is a rapidly-growing category and right now the funds are scattered everywhere. Put them under one roof, using standards similar to those applied to domestic income funds. It could be argued that there are not enough of them yet, to which my response would be that there are more than four such funds, which seems to be Morningstar’s cut-off point.

Socially-responsible funds. Some people prefer to put their money into funds that employ screens to weed out companies that engage in businesses that are deemed unethical (e.g. tobacco). But once you get beyond the Ethical and Meritas groups, they’re hard to find under the current system and they are compared with funds that have no such constraints. If we can have a separate category for real estate funds, with just 17 Morningstar entries, we should certainly have one for SRI funds. I realize that we’d end up with a cross-section of several different types of funds but at least people could easily find them.

I don’t expect any of this to happen, of course. The folks who create these fund categories seem to use a logic that only they can understand. But just once it would be nice if they’d give some thought to the beleaguered investors who are trying to make some sense out of all this.