UK-domiciled funds face fresh accusations of disclosure failings after a consumer campaign group struggled to identify potential closet trackers due to a lack of information.
Better Finance, a European group representing investors, last week published a list of potential closet trackers across Europe, based on methodology used by the European Securities and Markets Agency (Esma) in a similar study last year.
Unlike Esma, Better Finance published the names of those it thought were failing. Of the 467 UK-domiciled funds assessed, just 13 were identified as potential closet trackers – with the culprits predominately bank-run funds from the likes of Halifax and Santander.
However, Better Finance’s assessment attempts were hampered, it said, by the fact that more than 60 per cent of UK-domiciled funds could not be adequately examined due to a lack of transparency from fund groups.
This compared with just 36 per cent in Ireland and 34 per cent in Luxembourg, Europe’s other main fund domiciles.
Guillaume Prache, managing director of Better Finance, said the lack of additional benchmark-related information provided by fund groups made it impossible to analyse almost two thirds of the funds.
“There is an issue of transparency with UK funds,” he said. “This is frustrating. For the funds that do communicate this data, only 7 per cent seem to be potentially closet trackers. But as you can’t tell for over 60 per cent, who knows what we would find.”
Metrics that funds are failing to disclose to Morningstar, the data provider on whose statistics the Better Finance study was based, include active share ratios, tracking error, and the ‘r-squared’ ratio – representing the proportion of a fund’s movements that can be explained by moves in its benchmark.
A smaller subset of funds failed to include the performance of their benchmark in key investor information documents, according to Mr Prache, though he did not disclose names.
Morningstar director of UK manager research Jonathan Miller said he could not explain the difference between UK and European disclosure levels, but added: “Having more [information about] portfolio holdings would allow deeper analysis. Some fund managers prefer putting holdings out three months later – it is perhaps an avenue to pursue.”
He said one solution could be to copy regulation in the US – where fund managers are forced to publish holdings.
Concerns over a lack of information regarding portfolio holdings are not new. Yet, aside from high-profile moves from firms such as Woodford Investment Management to publish full breakdowns of their holdings, most fund managers continue to reveal only top-ten positions on a monthly basis.
The intermediated nature of the UK market could also be a factor, with some fund groups preferring to share details on an adhoc basis.
Mike Deverell, investment manager at wealth firm Equilibrium, said he did not think the UK had a major transparency issue, though he acknowledged retail investors were disadvantaged because much of the onus was on fund selectors to find out information.
“It is difficult for retail investors to get that kind of information. It’s easier if you have contact with fund managers as you can get that on request.
“It would be helpful if [more asset managers] provided an active share figure – but there’s always the risk it will be misinterpreted.”
Better Finance’s Mr Prache added: “There is room for improvement. Why specifically UK funds do not provide the data, I do not know,” he said.
The Better Finance research was conducted after Esma’s February 2016 report suggested as many as 15 per cent of European active equity funds could be closet trackers. The Better Finance report listed 165 potential culprits across Europe.
