Closet tracker funds appear to double to 17

This article is part of
Summer Investment Monitor - June 2015

The annualised tracking error for the same period was added to show how closely aligned the funds have been to their respective benchmarks. The cut-off point was one percentage point lower than the highest tracking error of tracker funds in that IA sector.

The funds were then analysed using ‘active share’. In this report, portfolios with an active share of 60 per cent or less are considered to be potential closet trackers.

Investment Adviser compared the average performance of these funds with their benchmark indices and sector. Individual funds can outperform or underperform the figure for a variety of reasons such as stock selection, fees, cash holdings and manager changes.

The funds in the tables are sorted by sector, and it does not include any funds with the stated aim of tracking an index, or any institutional funds, although some may have an institutional bias. All companies on the list were given the opportunity to respond.

Closet trackers: Definitions

R-squared: A statistical measure that represents the percentage of a fund’s movements that are related to a benchmark index. In theory the more actively managed the fund, the lower the R-squared. Index trackers carry an R-squared value of 95-100 per cent.

Tracking error: The typical tracking error of an index tracker should be 0 per cent, but depending on the method of tracking it can be slightly higher, as any changes to the index need to be reflected in the fund by buying and selling appropriate stocks.

OCF: A fund’s ongoing charge, which has to be listed on a fund’s Kiid under Ucits rules.

Active share: This measures the share of a portfolio’s holdings that differs from the holdings in the benchmark. An active share of 100 per cent implies zero overlap with the benchmark.

Active share: Manager’s view

JPMorgan Asset Management states: “Our view is that active share can be a useful tool for judging funds, but is not a panacea. We know from our research that it is certainly a useful predicator of active risk, but it is less clear whether active share can predict outperformance.

“Put another way, we would say that a high active share is no guarantee a fund will outperform, as simply being different from the index is not enough to beat it. Evaluating funds based solely on active share and tracking error can lead to inaccurate conclusions with regards to ‘closet index’ funds.