If you’ve tried to choose an investment fund on a DIY investing platform or fund supermarket, you’ll probably have come across a list of sectors. What does these investment fund sectors mean?
How investment fund sectors work
There are thousands of different investment funds and they’re classified by the sector they’re in. The sector can refer to the geographical area where they invest (namely, the part of the world where the company or government is based), the type of asset (such as shares, bonds or cash) or a mixture of both.
The sectors I’ve listed below are from the Investment Association website. It’s the association that represents providers of share-based funds such as unit trusts and OEICs (it stands for open-ended investment companies). It’s a bit of a monster of an article, but I hope you find it useful!
Funds in this sector are designed for what’s called ‘capital protection’. That means they’re not meant to lose any of your money.
- Short Term Money Market: Funds in this sector invest in so-called money market instruments. These include certificates of deposit and Treasury Bills (see below for an explanation of the jargon).
SAVVY TIP: A certificate of deposit is essentially a fixed term, fixed rate savings product. It pays a pre-defined rate of interest and money cannot be accessed before the end of the term. A Treasury Bill is a short term government bond, that lasts for between one and 364 days. A bond is essentially an IOU for a loan.
- Standard Money Market: These fund invest in money market instruments. Here, the products that the fund invests in have a longer minimum term than for the short term fund.
Companies and governments raise money by issuing bonds (IOUs for loans). Different types of bond funds invest in government bonds or company bonds.
- UK Gilts: These funds invest in government bonds. Most of the money they invest (80%) must go in UK government bonds (called ‘gilts’) or other countries’ government bonds that have a credit rating the same or higher than that of the UK.
- UK Index-Linked Gilts: This fund is similar to the one above, except it invests in government bonds that are linked to rises in the cost of living. Most of the fund (80%) must be invested in UK government index-linked bonds.
- £ Corporate Bond: Corporate bond funds invest in bonds, which companies issue when they want to raise money. Funds in this particular sector must invest at least 80% of their money in bonds that are issued in pounds sterling, rather than dollars etc. The bonds must be rated as BBB minus or higher.
SAVVY TIP: In the same way that people have a credit rating, so do bonds issued by companies and governments. There are several credit rating agencies and they have slightly different systems for rating companies (of course they do!). The lower the rating, the higher the interest rate that the company or government promises to pay. The downside is, the greater the chance that the company may not be able to repay the loan when the time comes.
- £ Strategic Bond: These funds invest at least 80% of their money in what are called fixed interest securities, that are issued in £ sterling. Fixed interest securities include both government and company bonds. Funds in this sector don’t have to buy these fixed interest securities directly. They can invest in another fund that fits the criteria.
SAVVY TIP: Funds in this sector can’t invest in certain types of fixed interest securities, such as permanent interest bearing shares and preference shares. You can read more about permanent interest bearing shares in my article. Preference shares are shares that pay out a fixed dividend. Most shares will pay out whatever dividend the board decides to pay: some years there may be no dividend at all.
- High Yield: These invest at least 80% of their assets in fixed interest securities that have been rated as below BBB minus. As before, these fixed interest securities must be offered in £ sterling. The reason the yield (i.e. the interest rate) is high is because there’s a reasonable risk that the company or government may not be able to pay back the loan. Funds in this sector can invest in bonds that aren’t rated. These funds can’t invest in things like preference shares and permanent interest bearing shares.
SAVVY TIP: You might think that an unrated bond is very risky. That isn’t necessarily the case. Some firms choose to issue a bond that’s not rated. It’s mainly because they don’t want to invest the expense or time in getting the bond rated. Companies as well known as John Lewis and Adidas have issued unrated bonds.
- Global Bonds: Funds in this category invest at least 80% of their assets in fixed interest securities.
SAVVY TIP: All funds with more than 80% of their money in fixed interest investments will come under this heading, even if they invest more than 80% of the fund in a particular geographic area. The only exception is if they invest more than 80% in UK fixed interest securities or global emerging markets fixed interest securities. In that case, the funds will be classified as UK or Global Emerging Markets, respectively.
- Global Emerging Markets Bond: These funds invest at least 80% of their assets in emerging market bonds as defined by a recognised Global Emerging Markets Bond index. Funds must be diversified by geographic region.
I refer to these as share-based funds, but the investment industry normally calls shares ‘equities’. They’re the same thing. These funds will have most of their money invested in shares.
- UK Equity Income: Funds in this sector must invest at least 80% of their money in UK equities (shares). They must also aim to pay out more in income (from dividends) than companies in the FTSE All-Share Index on a three-year rolling basis. They must aim to pay out 90% of the dividend level of the FTSE All Share on a 12-month basis.
- Global Equity Income: These funds must invest at least 80% of their money globally in shares. They must invest in shares around the world (and not be concentrated in one country or area). They should aim to produce an income through dividend payouts in excess of 100% of the MSCI World Index yield on a three-year rolling basis and 90% on an annual basis.
SAVVY TIP: The MSCI World Index is a stock market index of almost 1,600 companies from over 20 countries. If you want to know what dividends are, you can watch my video called dividends from shares explained.
Mixed Asset Sectors
These funds can invest in a mixture of shares and bonds.
- UK Equity and Bond Income: Funds in this sector must invest at least 80% of their assets in the UK. They have a lot of flexibility in how they split the investment, as long as between 20% and 80% is in UK fixed interest securities and between 20% and 80% in UK equities. The funds also aim to produce an income that’s over 120% of the FTSE All Share Index.
Equity Growth Funds – UK Equity
These funds invest most of their money in company shares. They’re less not designed to produce a regular income but aim to increase the value of your investment.
- UK All Companies: This is one of the more straightforward fund sectors. These funds must invest at least 80% of their assets in UK equities and they are focused on achieving capital growth.
- UK Smaller Companies: To be included in this sector, a fund must invest at least 80% of its money in shares in UK-listed companies which are the smallest 10% of publicly listed companies by market value (market capitalisation). It’s a bit of a clunky explanation, but it means your money will be invested in companies that are traded on the London Stock Exchange, but only the smallest 10% of companies.
Overseas share-based funds
- Japan: One of the more straightforward sectors to understand! Funds in this sector invest must invest at least 80% of their money in shares in Japanese companies.
- Japanese Smaller Companies: Funds must invest at least 80% of their money in shares in Japanese companies which are in the bottom 30% by market capitalisation.
- Asia Pacific Including Japan: Here, funds must invest at least 80% of their money in shares issued by companies based in the Asia Pacific region. Japanese companies can be included but they must make up less than 80% of assets held by the fund.
SAVVY TIP: The Asia Pacific region includes a range of countries, such as Japan, China, India, Pakistan and Australia and New Zealand.
- Asia Pacific Excluding Japan: As the name implies, the funds must invest at least 80% of their money in shares issued by companies based in the Asia Pacific region. Shares in Japanese companies cannot be included.
- China/Greater China: These funds must invest at least 80% of their assets directly or indirectly in shares in companies based in China, Hong Kong and/or Taiwan.
- North America: These funds must invest at least 80% of their money in shares in companies that are based in North America.
- North America Smaller Companies: These funds must invest at least 80% of their money in shares in companies that are based in North America, that make up the bottom 20% by market capitalisation.
- Europe Including UK: These funds must invest at least 80% of their money in shares in companies that are based in Europe. This can include companies based in the UK, but investments in these companies cannot make up more than 80% of the fund’s assets.
- Europe Excluding UK: These funds must invest at least 80% of their money in shares in companies that are based in Europe. Funds in this sector cannot invest in UK-based companies.
- European Smaller Companies: Funds in this sector must invest at least 80% of their assets in companies based in Europe that are in the bottom 20% of the European market (by value). They can include shares in UK-based companies in their funds, but they can only invest a maximum of 80% of their money in them.
SAVVY TIP: In this case ‘European market’ means all companies that are in the MSCI or FTSE pan-European stock market indices.
- Global: Funds in this category must invest at least 80% of their assets in shares issued by companies around the world. The funds should spread their money around different areas in the world.
- Global Emerging Markets: These funds invest 80% or more of their assets in shares in companies based in emerging market countries. What qualifies as an emerging market country is defined by several stock market indices. Funds can’t invest more than 20% of their money in so-called ‘frontier markets’.
SAVVY TIP: You may not have heard of the term ‘frontier market’, but in the investing world, it refers to a country that’s more developed than some of the least developed countries, but isn’t classified as an ‘emerging market’. It could be a small country that is relatively developed, such as Estonia, or a larger country that’s not so well developed, such as Kenya.
Mixed Asset Sectors
Funds in these sectors don’t have to invest their money in a particular part of the world, or exclude shares from a particular part of the world. Instead, they must invest no more than a certain percentage in shares.
- Mixed Investment 0-35% Shares: Funds in this sector must invest in a range of different investments, not just shares. As the name implies, up to 35% of the fund can be invested in company shares (equities). But there are other conditions as well. At least 45% of the fund must be in assets like company or government bonds (fixed income investments) and/or cash-based investments.
SAVVY TIP: At least 80% of the fund must be in £ sterling, dollar or euro based investments – with at least 40% in sterling.
- Mixed Investment 20-60% Shares: These funds must also invest in range of different investments. They must have between 20% and 60% of the fund in company shares. At least 30% of the fund must be in fixed income investments and/or cash-based investments.
SAVVY TIP: At least 60% of the fund must be in £ sterling, dollar or euro based investments – with at least 30% in sterling.
- Mixed Investment 40–85% Shares: As before, funds in this sector must split their money between different investments. But most of the fund can be invested in shares – as long as it’s between 40 and 85%.
SAVVY TIP: At least 50% of the fund must be in £ sterling, dollar or euro based investments – with at least 20% in sterling.
- Flexible Investment: Fund managers have a lot of flexibility about what they invest in. The fund can be totally invested in shares or have no money in shares at all.
- UK Direct Property: Funds in this sector must invest at least 70% of their money in UK property over five-year rolling periods. Any fund that invests less than 70% of its money in property over any 12 month period, or where UK property investments fall below 60% for any month may be removed from the sector.
SAVVY TIP: The property investment must be directly in bricks and mortar and cannot be via another property fund. It will normally include office blocks, shopping centres and other commercial developments.
- Property Other: Funds in this oddly named sector also invest in property. However, the requirements aren’t so strict. They still have to invest at least 70% of their money directly into property over five-year rolling periods. They can also qualify for inclusion in this sector by investing at least 80% of their assets in property-linked investments, or in a mixture of property and property-linked investments.
SAVVY TIP: These funds will tell you whether they invest in direct property, whether they put their money into property-linked investments or whether the fund is a mixture of the two (a hybrid).
- Specialist: These funds are sort of misfits in that they don’t fit into any of the other mainstream sectors. Because they are very specialist and vary so much, they won’t generally be ranked in the same way as other funds.
- Technology and Communications: Funds in this sector will invest at least 80% of their money in technology and telecommunications companies.
- Unclassified: The type of fund that’s most likely to come into this sector is a private fund where those running it don’t want it to be classified. Unclassified funds could also include those that haven’t complied with their sector rules, so have been removed.
Funds that are aiming to deliver a particular outcome
While most investment funds are classified by what they invest in, one or two are classified by what they aim to deliver. Be aware that these so-called absolute return funds are quite controversial. That’s because, although they aim to deliver a return greater than zero after fees, there’s absolutely no obligation on them to do this. You can’t ask for your money back if they produce no return or lose money.
- Targeted Absolute Return: These funds aim to deliver what’s called a positive return. That means they aim to increase your investment (rather than lose your money!). But (and it’s a big ‘but’), this is not a promise, it’s just an aim. Some funds may have an aim of delivering a certain minimum level of return, rather than just ‘a return’. However, this won’t be guaranteed. Some funds charge a hefty performance fee if they deliver a return.
- Volatility Managed: These funds aim to limit their volatility. Volatility is the amount that a fund or share rises and falls in price (and the frequency with which it does so). The higher the volatility, the more investing may feel like a roller coaster ride!
SAVVY TIP: Different funds in this sector will aim to limit the volatility by different amounts. So one fund in the volatility managed sector may be much less volatile than another one. Also bear in mind that they don’t guarantee to limit volatility to within specific limits.
You read more information about sector definitions on the Investment Association website.
A guide to stocks and shares ISAs
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