Revealed: the ‘closet trackers’ charging full active fees
A significant number of funds that are expected to be actively managed, and charge full management fees, have actually been hugging their benchmarks for the past three years, Investment Adviser research shows.
Products from giants including Scottish Widows Investment Partnership (Swip), Santander, Threadneedle, Smith & Williamson, Franklin Templeton and JPMorgan Asset Manage-ment have all been flagged as ‘closet trackers’ in the third annual Mid-Year Monitor report.
Funds flagged in the sector include Swip’s £190m MM UK Equity Growth fund, which carries the highest total expense ratio (TER) on the list at 1.82 per cent.
The three-year Morningstar data, which compares UK fund performance against the FTSE All-Share index, shows the fund has an annualised tracking error of just 4.49, lower than some passive ‘tracker’ funds that show tracking error of as much as 5.25 per cent.
The fund’s three-year R-Squared value is 96, where 100 is the maximum. Its active share is 42.09 per cent, where funds with an active share of 60 per cent or less are considered to be potential trackers.
The Swip portfolio is run by sub-managers from three investment houses – Henderson, Four Capital and Investec, each running a third of the fund on a partly quantitative, partly value and partly ‘contrarian’ investment style. Other large UK funds flagged include the £239.3m JPMorgan UK Managed Equity fund and the £228.8m Threadneedle UK Select fund.
The £222.7m JPMorgan UK Equity fund was identified as having one of the lowest active share values in the list of 21 closet trackers in the IMA UK All Companies sector at 35.11 per cent.
Michael Barakos, CIO of JPMorgan Asset Management’s European equity group behavioural finance team, who runs the team alongside Ben Stapley and Ian Butler, said as a result of a significant period of underperformance in 2007 and 2008 the fund’s approach was changed.
“We changed how we ran it from being this core, low tracking error, tight risk constraint portfolio – which I think is reflected in half of your numbers – to a rather different portfolio and we have upped the tracking error alongside it,” he said.
“What we do now is run this portfolio as two sub funds, one as value and we use qualitative screening to uncover the value traps, and then the other sub fund is a combination of earnings revisions, price momentum and quality management.”
Elsewhere, with a tracking error of 4.2 and an R-Squared value of 97.23 compared with the MSCI Emerging Markets index, the £201.7m Swip Emerging Markets fund sits firmly within the list of emerging market-focused closet tracker funds.