IFIC Comments on CSA Approach to Fund Risk Classification
Toronto, ON – March 9, 2016 – In a submission filed today, the Investment Funds Institute of Canada (IFIC) expressed broad support for the proposed CSA Mutual Fund Risk Classification Methodology for Use in Fund Facts and ETF Facts, and suggested a number of enhancements.
“IFIC’s members generally endorse a mandated approach to fund risk classification,” said Joanne De Laurentiis, IFIC president and CEO. “The CSA’s plans to build on the standard deviation methodology that is already in wide use by the industry and to retain a five-band risk scale in Fund Facts will speed implementation by reducing the time required for new systems development and training. The proposed CSA methodology will serve investors, dealers and fund managers well.”
Standard deviation already has been adopted as a risk indicator by much of the industry. It was used by a group of IFIC members in 2003 to develop voluntary guidelines that would give mutual fund managers a consistent method of measuring and describing fund volatility risk. Since then, IFIC’s Fund Risk Classification Task Force has updated IFIC’s voluntary guidelines annually.
“Volatility risk is a well-accepted approach to expressing fund risk and, according to the CSA’s research, the five band approach used in Fund Facts is well understood by investors,” said De Laurentiis. “It is one of several types of risk that are relevant to account holders. Advised investors can use the fund risk measure contained in Fund Facts as a jumping off point for broader discussions of risk as it applies to their own situations.”
In its submission, IFIC asked for clarification of some aspects of the proposed model and suggested enhancements, including that the CSA establish an advisory committee similar to IFIC’s task force to ensure that the CSA’s methodology remains relevant. IFIC recommends that the review committee include industry representatives and data providers, along with academics and regulatory staff, to ensure that the deliberations will benefit from the expertise and insights of those with hands-on experience.
The CSA proposal outlines a number of principles for choosing a reference index for those funds that do not have a 10-year performance history. IFIC’s submission notes that additional guidance is necessary for those situations where there is little or no fund history, and where there is no reference index with a 10-year history that is appropriate for the fund. In these cases, it will also be necessary to allow managers some discretion in determining an appropriate reference index.
The Investment Funds Institute of Canada is the voice of Canada’s investment funds industry. IFIC brings together 150 organizations, including fund managers, distributors and industry service organizations, to foster a strong, stable investment sector where investors can realize their financial goals. By connecting Canada’s savers to Canada’s economy, our industry contributes significantly to Canadian economic growth and job creation. The organization is proud to have served Canada’s mutual fund industry and its investors for more than 50 years.
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