Closet indexing is nothing new but what a recent SCM Private report shows is it’s a lot more widespread than we thought.
The report reveals that 40 per cent of an average UK actively managed fund is simply a replica of the same index it is trying to beat. What is more interesting is that only 30 per cent of UK fund managers are significantly different from the same indices they are actually tracking.
This has implications in terms of both fees and performance. The research shows that nearly nine out of 10 closet indexers in the UK equity sector fail to beat the FTSE All-Share index in the five-year period up to August 2013.
So, in effect, these closet index huggers are charging active fees for a performance that is worse than if you simply bought a passive fund.
Add to this a recent report by Morningstar, which showed that when it came to fees and expenses, the UK fund industry ranked behind India, China and Thailand.
The problem for advisers is that it is near-on impossible to specifically identify index huggers as fund managers only disclose their holdings once a year. My advice is, if in doubt, buy trackers.
Abraham Okusanya is principal at FinalytiQ
