CIFSC: Putting funds in their place
How the Canadian Investment Funds Standards Committee sets and maintains categories
The Canadian Investment Funds Standards Committee (CIFSC) recently approved the launch of two new categories – Alternative Private Debt and Alternative Private Equity, effective Nov. 30, 2021. As a member of CIFSC, I thought I’d take this opportunity to shed some light on the process behind the introduction of new categories and give an overview the committee’s operations.
The CIFSC was formed in 1998 by the major data providers in Canada with the purpose of creating defined investment fund categories that could be used across the industry. Prior to that, data providers and fund companies individually created and tracked their own categories with no uniform cross-industry criteria.
Consisting of five voting and eight non-voting members, the CIFSC is an investment fund categorization committee, which is responsible for categorizing mutual funds, exchange-traded funds (ETFs), segregated funds, pooled funds, and hedge funds based on their holdings and their investment mandate as described in regulatory documents. The voting members are the major data providers in Canada, and the non-voting members are some of the major industry associations.
The committee meets once a month to categorize new funds and consider requests to have categories changed for certain funds. The committee also continually monitors at the categories as a whole to see if there are areas for new categories to be added or hived off, if any categories have become irrelevant, or if any category definitions need to be updated or changed in any way. Once a quarter, we also look at the entire fund universe to determine if any funds are offside according to their category parameters – a process we call the Quarterly Review.
New categories or category changes
The committee is always looking at the category definitions and overall category structure to see if there are any improvements to be made. This can be anything from a simple tweak in the wording to help clarify a definition, to the termination of a category that has become redundant or irrelevant, to the creation of a new category to segment a growing group of funds with a risk/return profile that is different from existing categories. We also take recommendations on category changes from external sources, and we welcome feedback at any time through the CIFSC website www.cifsc.org.
When the CIFSC proposes new categories or category changes, a significant amount of work has already been done. When creating new categories, the starting point is identifying a group of funds that doesn’t fit well in their existing category. That involves analyzing current and historical data, trying to determine industry trends and whether that group of funds is likely to continue to grow. Then the committee needs to assess the impact the new category will have on existing categories, trying to minimize the effects when possible, and write a category definition that will fit in well with the existing categories.
New categories and changes need to be approved by majority vote before they are put out for a public comment period and are released only at the end of calendar quarters. After comments are received, the committee votes again on whether to implement the change. After final approval, the committee allows for a 60-day implementation period, so that key stakeholders have a chance to update systems and processes to accommodate the changes.
New fund classifications
Every month the committee’s data-provider members aggregate a list of new funds that have come on to their respective databases since the previous meeting. To determine the most appropriate category, the committee will look at the initial holdings when they are available, refer to the fund’s investment mandate stated in the prospectus or other regulatory documents, and consider the category that is requested by the fund company.
Category reclassification request
Throughout a given month, the committee takes requests from fund companies to have a fund change category. The requests generally come from the fund company if there has been a significant change to the fund’s investment mandate or if they feel the fund no longer meets the definition of its current category based on the historical portfolio holdings.
The CIFSC always uses a 3-year weighted average for portfolio and threshold calculations where 50% is applied to the most recent 12 months, 30% to the next 12, and 20% to the next 12. However, when a fund has had a significant mandate change, the committee will usually make the change even if the fund’s historical holdings are not yet in line with the category thresholds.
Quarterly fund review
As the name suggests, the Quarterly Review occurs four times per year. It starts as a completely quantitative review of the entire fund universe based on fund holdings at the end of each calendar quarter to identify funds that are offside their current category thresholds.
Funds generally are not considered for a move if they have just crossed a threshold for the first time and they are offside by only 1%-2%. This is to avoid having funds change categories multiple times in a year. But if a trend persists or if the fund is offside by a significant amount, the committee will make the change. Fund companies are notified of the change and are given a chance to contend the move.
With its mandate and intensive data-driven approach, the CIFSC gives investors and advisors a robust tool to easily compare funds with similar investment mandates and similar portfolios, to give them an idea about what the fund is holding, and to indicate the risk/return profile that can be expected from a fund based on its CIFSC category.
Reid Baker, CERA, ASA, is Vice President, Analytics and Data, at Fundata Canada Inc., a leading source for investment fund information, and is Chair of the Canadian Investment Funds Standards Committee (CIFSC).
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