Closet tracker funds

This article is part of
Summer Investment Monitor - June 2014

The number of potential ‘closet tracker’ funds – those that charge an active fee but appear to be closely aligned to their respective benchmarks – has declined for the second year in a row, Investment Adviser research can reveal.

In 2013, the number of funds identified by our metric – see right – was just nine, and this year it has dropped to eight, although these are spread across four sectors.

Once again the IMA North America sector has the most ‘closet trackers’ at three, with the Legg Mason ClearBridge US Appreciation fund making a return appearance with the highest R-Squared figure and lowest tracking error.

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The PSigma American fund makes its first appearance with an R-Squared of 0.95 and an active share of 56.8 per cent, just within the parameters, but manager James Abate suggests this is actually a good thing.

He says: “Our thesis with the fund is to deliver superior risk-adjusted returns over a full cycle and, in particular, deliver market returns in an up-market – such as the past three years – and capture alpha and lower risk in down markets. The fact we have high correlation on the upside tells me that I’m doing my job properly.”

The Halifax North American fund, meanwhile scrapes into the list in terms of the R-Squared value, but its active share is just 34.31 per cent. A spokesperson for Lloyds Banking Group, which also runs the Scottish Widows Global Emerging Markets fund which made the list with an R-Squared of 0.98 and an active share of 35.13 per cent, notes that for some funds the customer’s best interest is “best served by aiming for a smaller degree of outperformance, with a return closer to the index, rather than there being potential for significant variation over short periods”.

Meanwhile the other EM fund that just made the cut with an active share of 58.57 per cent and an R-Squared of 0.99, is the Schroders Global Emerging Markets fund. But Allan Conway, head of emerging market equities at Schroders, points out the fund has outperformed the MSCI Emerging Markets index in a three-year period and “consistently outperformed in the longer term”.

He adds: “We believe that it is inappropriate to take risk just for the sake of it and vary the risk we take depending on the confidence we have in the outlook. Following the financial crisis, the global outlook has become extremely uncertain. Consequently the amount of risk we have been taking is somewhat lower than would otherwise be the case.”

This year the IMA UK All Companies sector has just one fund, the Kames UK Equity fund, which scraped in with an R-Squared of 0.95 and an active share of 56.8 per cent. Meanwhile, the IMA Europe ex UK sector has two funds, and while both have high R-Squared values, their active share calculations only just slipped into the metric.

The CF CanLife European has an R-Squared of 0.97 and an active share of 57.16 per cent, but a Canada Life Investments spokesperson says: “We believe in the benefits of active management and our fund managers are empowered to take high-conviction, non-consensus positions. Mr McNeill took over the management of this fund just 18 months ago, so therefore the historic performance data is a blend of two very different fund managers. Since Iain took control he has implemented significant changes to its strategy to reflect his style.”