The EFC is a pan-European system for classifying investment funds, led by FE fundinfo as the classification administrator. It allows users to find and compare funds like for like. “The EFC allows us to produce classification data that uses automation and is based on fund holdings. When we receive a full portfolio, we are able to generate a proper classification according to the weightings and asset allocation,” Colautti says.
The EFC also allows asset managers to compare their performance against their peers. “Asset managers and data consumers are looking for standardised quantification, but also peer group performance, to better compare funds and ratings performance,” Jørgensen says.
What makes the EFC unique is the fact that it is industry-owned, free of charge and fully independent, driven by the European Fund and Asset Management association, fund groups and data vendors. “From a pure data vendor perspective, you don't want people reading KIDs constantly in order to update their classification. The fact that it's based on fund holdings helps an investor better understand a fund strategy, and therefore adjust their investment decisions based on real portfolio constituents,” Colautti says.
Verified and indicative classification
The EFC is divided into six high-level categories: equities, bonds, multi-asset, money market, absolute return investment strategies and others. If further segments funds based on sector, country, currency and market capitalisation.
Two types of classifications exist within the EFC: verified and indicative. Verified classification involves cooperation with asset managers and uses real holdings data for accuracy and transparency. Whereas indicative classification, introduced in 2018, offers an initial indication of a fund's classification based on its investment policy, providing asset managers with greater flexibility and serving as a preliminary step towards verified classification.
“If you are an asset manager and you do not want to disclose your portfolio holdings, for example, or if you want to have your funds classified without having the verified process, submit your portfolio holdings, sign NDAs, have your holdings reviewed constantly, the indicative process allows for greater flexibility,” Colautti says.
New growth markets
New markets continue to be added to the EFC, expanding the classification system’s coverage. In May, over 30,000 new share classes were added to the EFC, providing almost complete coverage of all funds in Italy, France and the UK, and bringing the total number of share classes covered in the EFC to 115,000. “This gives us greater coverage but also provides investors with more options and possibilities to filter and select funds,” Colautti says.
He believes receiving the support of national fund associations will help expand coverage and further the EFC’s growth strategy to provide comprehensive coverage of all the major European markets. In the Luxembourg market there is still room to grow. Of the 95,000 Luxembourg-domiciled share classes, Colautti says slightly over 55% are EFC-classified.