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Calls for the Investment Management Association to alter its sectors come loud and often. Questions are continually raised over whether the Specialist sector in particular, which contains an unhealthy mix of property, single country and financials funds, should be split into its constituent elements.

Last week, however, after consultation with its members, the IMA Performance Category Review Committee announced changes to its Fixed Income sectors. The UK Corporate Bond and UK Other Bond sectors will now be split into three: Sterling Corporate Bond, Sterling Strategic Bond and Sterling High Yield. Alongside, the definitions of the UK Gilts and UK Index Linked Gilts sectors are converging with the Association of British Insurers’ own sector classifications.

Mona Patel, head of consumer affairs at the IMA, explains the process came out of discussions held by the review committee. Indeed, as Peter Hicks, executive director of UK retail at Fidelity International explains, the moves are very much in tune with the changing nature of the bond universe.

“The world of fixed income has changed dramatically and fund managers have a much wider universe of investment opportunities, even after the credit crunch,” he says. “Now, our bond fund managers are making more diverse investments to spread sources of risk and return. With quality fixed income funds remaining popular, these new classifications will give both the industry and investors a better and more accurate yardstick.”

Change has been considerable. As Mr Hicks points out, there are now corporate bond funds that are larger than gilt funds – something that was unthinkable just seven or eight years ago. The problem before was one of comparison – not just on performance terms, but also when it came to risk exposure. Because some of the funds were allowed an equity component those, obviously, with the higher degree of exposure did well in bull markets leaving purer bond funds floundering at the bottom of their peer groups.

“For years, fund returns have been very divergent within the bond sectors because very few funds do what they say on the tin,” explains Chris Bowie, head of credit at Resolution Asset Management. “Some of the bond funds could hold preference shares or convertible bonds. You could also see long-dated or short-dated bond funds and those that only invested in financials or others that were quasi-government bond funds.”

Homogeneity within the sectors was the ultimate aim of the change – making sure that peer groups actually were just that. The point is simple: too much variety in the nature of the underlying funds made the sectors meaningless in their current form and they had to change. The move, however, was not without its difficulties. While Ms Patel is loath to divulge the temper of the review committee’s meetings, Mr Bowie suggests some fund management groups – his own included – felt the changes did not go far enough.

Under the new provisions, funds will be eligible into the Sterling Corporate Bond sector if they, according to the IMA, invest at least 80 per cent of their assets in “sterling-denominated (or hedged back into sterling) triple-B-or-above corporate bond securities”.

“We would have preferred to have seen that raised to 95 per cent,” Mr Bowie says. “Lots of investors were keen for funds in the sector not to have any equity exposure at all.”

Yet under the Ucits III rules, the IMA’s classifications may soon become meaningless, he warns. “Under the Ucits III structure a corporate bond fund could have a complicated derivative exposure and the same impact as if it was 100 per cent invested in equities.”

A corporate bond fund may have the requisite amount invested appropriately, Mr Bowie explains, but if there is an underlying derivatives play then actually the performance of the fund may differ widely from its supposed peers.

“Even if we did go down to allowing just 5 per cent invested in non-corporate bonds,” he admits ruefully, “then even at that very low level Ucits III allows you to invest more widely.” Eventually, he continues, the whole notion of classification itself may become irrelevant. “The IMA may be moving towards classifying purer corporate bond funds, but Ucits III will undermine that.”

Hugo Greenhalgh is editor of Investment Adviser