The European Fund Classification (EFC) is a system that has been set up “by fund managers, for fund managers,” said Miranda Seath, Efama taskforce chair and director of market insight and fund sectors at the Investment Association, during her introduction to the webinar, which took place on 26 May 2023. “That’s unlike many other classifications. So it’s completely owned and managed by the fund industry itself. And there are no single commercial interests at play here.” It’s free to get funds classified, and it’s free to see the results, she highlighted.
The Efama taskforce, which consists of national associations and fund managers, oversees the development and evolution of the categorisation system, Seath explained. It gives input and ensures that the classification system continues to reflect the market.
“Everything is in the public domain,” she added. All the data is publicly available. “And that transparency is really important.”
“Compare like with like”
“European Fund Classification is a pan-European classification system, allowing users to find and compare like for like funds,” said Thomas Tilley, senior economist at Efama. It is “steered” by the European Fund Categorisation Forum.
The EFC was set up 12 years ago in response to an increasing number of a cross-border fund sales and a “clear need to compare funds across different jurisdictions, making sure we compare like with like,” he explained. The EFC is meant to be used by industry professionals, including fund managers, distributors and data vendors--“the whole ecosystem of the fund industry.”
Though the classification system does not specifically target retail investors and is maybe a bit “too complex” for this general audience. Retail investors are, of course, free to look at and use the classification results, said Tilley.
Two types of classifications: verified and indicative
The system has two types of classifications, explained Tilley. One is the verified classification--“the holy grail”--where fund managers provide their asset holdings of their fund range to the classification administrator--FE fundinfo, in this case. The administrator then classifies funds “according to transparent and well-defined criteria” and classifications are reviewed on a quarterly basis to ensure that funds adhere to the criteria.
A total of 6,986 funds have verified classifications, according to the Efama website. The majority of them are equity funds (3,132), followed by bonds (1,951), multi-asset funds (995), Asset Recovery Incentivisation Scheme (ARIS) funds (313), money market funds (151) and other funds (444).
An “indicative” classification, which is the second type of classification, can be seen as “stepping stone” towards the verified classification, said Tilley. It’s meant to give an “indication of what the fund’s classification would be,” and to “stimulate fund groups to actually move forward and have their funds verified.” The EFC contains 11,313 funds in the indicative classification category.
Which funds are included?
“The scope is all European funds,” said Tilley. Ucits (undertaking for collective investment in transferable securities) and AIFs (alternative investment funds) are included, as well as exchange-traded funds (ETFs), which are identified separately.
“We also have a very small number of non-European funds,” he added. Fund groups often come with their “entire fund range, not just their European funds,” and so these get classified as well.
“Continuous process” of evolution
The classification system has made “quite some progress in recent years,” noted Tilley. The evolution of categories and data fields is “a continuous process of adjusting the categories to reflect current market evolutions and new regulations.”
Recent revisions include:
- changes to money market fund definitions to comply with new regulation (2019)
- changes to bond fund categories and the addition of investment themes--such as water or clean energy--in equity funds (2020)
- the addition of ESG information, such as article 8 or 9 funds, and ETF-specific information (2021/2022)
- a separate flag for the Ucits/AIFMD information and revision of the list of equity fund investment themes (2023)
Expansion and future plans
“This month, we massively expanded the coverage of the indicative classification,” said Tilley. Almost 27,000 new share classes were added. “We now have an almost complete coverage of all funds in three of the largest European countries. We are almost completely covering France, Italy and the United Kingdom.”
In the future, the EFC aims to “continue to expand our fund coverage by mapping where we have data gaps, and then reaching out specifically to fund managers, trying to convince them to have their funds classified,” said Tilley. “We want to also stimulate further use of the classification results.”
Fund managers can have their fund ranges classified; national associations or Efama members can apply to join the classification taskforce; and users of the classification system can apply to join the EFC user group to provide input on coverage, categories and usability, concluded Tilley.