Index Hugging Active Funds Double In UK

There are now 17 so-called closet index active funds in the UK, up from eight funds one year ago  

Editor, Europe
Reviewed by: Rachael Revesz
Edited by: Rachael Revesz

Closet tracker funds – actively managed funds which closely replicate a benchmark rather than generate alpha to justify their higher fees – have doubled in the UK, new research has revealed, in a damning indictment of the fund industry.

The number of these benchmark-hugging active funds has risen by over 100 percent from eight to 17 funds over the past 12 months, according to Morningstar, and the vast majority of these funds fall into the Investment Association’s UK All Companies sector.

Their analysis, compiled for publication Investment Adviser, looked at tracking error, the R-squared measure and active share of close to 600 funds across four UK asset classes, to show how much the active fund moves away from its benchmark index.

The research follows similar reports from asset manager SCM Private, which showed earlier this year that there was a growing trend of closet indexing in the UK, yet the Financial Conduct Authority has not taken concrete moves to stamp down on the practice.

SCM Private’s founding partner and founder of the True and Fair Campaign, Gina Miller, said in a statement today that as a result of increased information efficiency and competition, “[…] funds are aggressively marketed as doing something different / special but as the funds under management swell, managers are inclined to take less risk / be less different from the index for fear of losing their AUM.”

Miller recommended that 100 percent of holdings are published transparently online, at least every three months, and all funds to publish “active share” on their factsheets to signify how much they are moving away from the index, as well as a figure to demonstrate the total cost of investing.

Other bodies have taken steps against closet indexing like the European regulator ESMA, as well as individual countries like Sweden and the U.S.

Rachael Revesz joined in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.