Morningstar canada’s withdrawal from the Canadian Investment Fund Standards Committee and its decision to develop independently an alternative classification system for mutual funds by this summer may create some confusion in the marketplace.

The Toronto-based provider of Canadian fund data, including performance and ranking information, announced its withdrawal from the 15-member CIFSC in February because of dissatisfaction with the definition of fund classification categories. Morningstar is also unhappy with the CIFSC’s ongoing monitoring of fund holdings for the purpose of ensuring that funds are in the appropriate categories. Typically, funds are assigned to categories, such as pure Canadian equity or Canadian small-cap, so they may be compared with other funds in their peer group.

Ralf Hensel, CIFSC chairman and senior legal counsel of the Investment Funds Institute of Canada, had been hoping to persuade Morningstar to stay. He says he is disappointed by the company’s plans to launch a competing system.

“I hope Morningstar doesn’t proceed with it. But if that’s the plan, it will be difficult and confusing for consumers and the industry to deal with more than one system,” Hensel says. “The reason why the committee was created in the first place was the belief that one system was the way to go. Multiple methodologies make no sense.”

A CIFSC proposal for a revised classification system is currently being reviewed by an industry working group composed of representatives of major fund companies, he says. The proposal includes 34 categories, he adds, and subdividing these further could make analysis more complicated. (see page 32)

In a recent letter to clients, Morningstar president Scott Mackenzie, founding chairman of the CIFSC in 1998, said: “One of the initial goals of the committee was to provide the average investor with a reliable, convenient ‘first filter’ on fund selection. Rest assured that we are committed to this objective in the development of a new category scheme.”

Three Morningstar employees — including Rudy Luukko, investment funds editor — sit on the CIFSC, but will soon be leaving.

The date of the resignations has yet to be finalized, says Luukko: “There are still some transitional issues to be resolved.”

For example, Morningstar is the supplier of a data feed to the CIFSC’s Web site.

“Morningstar’s position is that the defining and monitoring of fund categories can be done more effectively by Morningstar as a single firm rather than through participation in the committee process, which requires longer timelines for making decisions,” Luukko says. “While the committee might meet for a few hours several times a month, Morningstar can be working on a new scheme for fund categorization every day.”

Several issues have made fund categorization increasingly complex, says Luukko, including the growth in income trusts and their inclusion in the S&P/TSX composite index, the proliferation of new types of balanced and income funds, and the removal of the 30% foreign-content limit in RRSP-eligible funds. The last item raises the question of how much foreign content a Canadian equity fund may have and yet still qualify for the domestic equity category.

If the CIFSC continues with its categorization scheme, having more than one system in the marketplace could be problematic. However, investors are already accustomed to having choice in terms of information, Luukko says. For example, both and Morningstar provide performance information and ratings. IE