This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

Closet Indexing

I am returning to the subject of closet indexing, which is the name given to asset managers who claim to be active managers and charge active fees, but make their investments so that they are unlikely to underperform the index or outperform it. We have made the point to the FCA in a consultation response about the problems with closet trackers. It is good to see the FT giving the issue high profile coverage.

The FT published an article on 8 May 2019, headed

Fund industry can flush out the closet trackers- Disclosure of the true cost of active management will help both investors and society

The article said:

Active management is under pressure. Asset managers face “feemageddon” as they cut prices to compete with close-to-free index-tracking funds. At the same time, critics of active managers claim there are too many closet trackers — funds that charge active fees (typically five to 10 times higher than an index fund) but simply hug an index.

Morningstar found that one-fifth to two-fifths of European large-cap funds fall into this category. In the UK, this phenomenon is monitored by the Financial Conduct Authority, which has introduced rules on how funds benchmark themselves.

The FT article was written by Alex Edmans a professor of finance at London Business School and Gresham College and Tom Gosling an executive fellow at London Business School, who are both widely respected. See https://www.ft.com/content/66211dac-5093-3bb4-88dd-3ce3565309a1

A previous ShareSoc article on closet indexing is here:

Closet Index Trackers – Investigations in Progress

 

Cliff Weight, Director, ShareSoc

 

 

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