The Investment Association has attempted to dispel concerns over active funds that hug their benchmark by challenging both UK and European regulators' assumptions about the scale of the problem.
As part of its response to FCA's Asset Management Study, the trade body questioned the FCA's claims that £109bn of assets could be in 'partly active' funds which nonetheless levied high charges.
Focusing specifically on the UK funds, the IA replicated 2016 research from the European Securities and Markets Agency (Esma) and said just 27 funds out of 546 met the European body's definition of a potential closet tracker.
The IA said: "Only half of these [27 funds] had a negative alpha net of fees.
"Considering other factors besides performance, such as management fee and active share figures over several years, resulted in only a handful of funds that would still merit further attention to assess whether an issue existed with respect to investor literature and how investment objectives are communicated."
Esma's own research suggested 15 per cent of all equity funds in Europe could potentially be providing near-market returns, despite being marketed as active strategies and charging active fees.
The IA said Esma's three metrics - r-squared, tracking error and active share - may flag potential benchmark-huggers but could never provide conclusive evidence.
The latest attempt to assess the extent of closet tracking comes shortly after Better Finance, a European consumer body, named and shamed funds which it suspected had fallen foul Esma's study.
Investment Adviser reported this week that Better Finance's work was hampered by a significant lack of disclosure for UK funds. This issue appears to have also affected the IA's own analysis, albeit to a lesser extent. Just over 100 funds did not provide enough data to be analysed by the trade body.
The IA said the main issue to watch out for was not investment metrics, but whether performance matches funds' stated investment objectives.
"The IA is keen to work with regulators to ensure that an accessible and dependable framework emerges to help consumers understand investment fund investment objectives and delivery. The technical analysis described above is designed to find effective ways to facilitate this," the trade body told the FCA.
Aside from its market study, the FCA published results of a thematic review on the issue of closet tracking in April last year. The regulator demanded funds groups do more to clarify how products are managed.
The IA's response to the market study also saw it contest other reforms proposed by the regulator. Introducing independent boards for open-ended funds would do little to improve competition, the trade body said, though it acknowledged this level of oversight may improve governance.
