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Potential closet trackers named and shamed

Potential closet trackers named and shamed

A list of asset managers which have potentially sold so-called ‘closet tracker’ funds has been published, amid an industry-wide crackdown on funds which charge a high price for closely imitating the index.

The list, which has been compiled by campaign group Better Finance, mentioned some of the biggest names in the asset management industry, including the likes of Henderson, Fidelity, JP Morgan and Schroders.

Active managers have increasingly been in the spotlight as more investors turn to cheaper passive funds, and last year the Financial Conduct Authority criticised active funds fees for lacking in competition.

The financial watchdog is also clamping down on expensive tracker funds which are disguised as active vehicles.

The report from Better Finance, which looked to replicate the European Securities and Markets Authority (Esma) study on closet indexing, identified 165 equity Ucits funds that could potentially be closet indexers.

Esma refused to disclose the names of the funds it identified as “potential equity closet indexing funds” when it released the results of its investigation back in February last year.

According to the Better Finance, this left many investors in the dark. 

By sampling 2,332 equity funds using Esma’s sampling criteria, the group broke the funds down into categories, of which 57 per cent escaped scrutiny because of a lack of available information in Morningstar. 

It found up to 16 per cent of the sufficiently transparent funds showed characteristics which flagged them as being potential closet index funds.

Guillaume Prache, managing director of Better Finance, called on regulators and the asset managers to provide clear reasons for charging annual ‘active’ fees of between 75 per cent and 3 per cent to investors in these “potentially false” active funds.

Exchange-traded funds typically charge between 0.05 per cent and 0.30 per cent each year.

Better Finance also urged Esma and national regulators to provide much more transparency on funds’ metrics and to expand their investigations to the majority of EU-domiciled active equity funds.

Mr Prache said: “Restoring savers’ and investors’ confidence is key for growth and jobs in Europe as highlighted by the EU authorities. 

“These findings are clear proof that EU regulators must not eliminate the standardised disclosure of the long-term and relative past performance of retail investment products to their benchmark, as they unfortunately plan to do in the implementing rules for Pripps.”

A spokesman for Fidelity, which has nine funds in the list, pointed out that the average active share across Fidelity’s fund range is currently 74.3 per cent, significantly above the 60 per cent threshold.

He also said 95 per cent of the assets in the funds listed are held by institutional investors looking for specialist access to thematic or niche investments.  

“These types of funds often use large-cap indices and invest in smaller number of companies, resulting in a lower active share.

“Therefore, active share and tracking error are both useful tools in measuring how different a portfolio is from its benchmark, but in our view these shouldn’t be the only lens through which investors judge a fund.”