RegulationFeb 2 2016

Up to 15% of funds are ‘closet trackers’ - Regulator

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Up to 15% of funds are ‘closet trackers’ - Regulator

The European Securities and Markets Agency (Esma) has found up to 15 per cent of Ucits equity funds may be ‘closet trackers’, and has committed to further regulatory work as a result.

The European financial regulator conducted a study into active funds which could be misleading investors by overcharging for a service which is closer to passive investing.

Esma found 15 per cent of the 1,250 funds it scrutinised may be closet trackers, given they had an active share below 60 per cent and a tracking error below 4 per cent.

Some 7 per cent had an active share below 50 per cent and tracking error below 3 per cent.

The regulator said its initial quantitative study, which focused on funds more than ten years old and with more than €50m (£38m) in assets, looked at active share, tracking error and a statistical variable coefficient, R2.

Esma said it was mindful of the limitations of the quantitative analysis, but added more work would follow.

“Definitive evidence, potentially leading to supervisory action, will require a more detailed follow-up by national competent authorities, including on the actual information provided by funds to investors,” it added.

Esma said the next steps would involve collaborative work with national bodies, such as the FCA. This would include a more in-depth investigation on a fund by fund basis. It warned this could lead to changes to the Ucits framework.

Analysts at JPMorgan Cazenove suggested last month that the FCA’s separate asset management market study could lead to a crackdown on closet trackers.

The European regulator added in its announcement today (February 2): “Esma will also assess the need for further steps to ensure that all market participants comply with disclosure obligations to the full extent.

“Where Esma has identified potential shortcomings in the Ucits framework that could create a potential for closet indexing (e.g. on disclosure obligations), it will analyse the need for further clarification, with a view to creating a level playing field for all stakeholders across the EU,” it said.

Esma chair Steven Maijoor said: “Closet indexing is an issue which has attracted the attention of investor protection groups and investors alike throughout the European Union and Esma has played a key role in an EU-wide inquiry to get to the heart of the matter.

“Investor protection is core to our mission and the preliminary findings raise questions that merit closer analysis. Fund managers must provide investors with information that is fair, clear and not misleading.”