A high-profile study by the European Securities and Markets Authority (Esma) into “closet trackers” – funds that claim to be actively managed but in reality merely track an index – may significantly underestimate the scale of the problem, writes Madison Marriage in the FT. In February, Esma stated that up to one sixth of actively managed equity funds in Europe could be closet trackers. However, SCM Private, a UK asset manager, says that its own study – using the same approach – has suggest that Esma’s results are “misleading” and “flawed”.
SCM looked at 168 UK retail unit trusts and open-ended investment companies (OEICs) and used the same metrics as Esma to identify funds that were tracking an index. It concluded that some explicit index funds, such as the Henderson UK Equity Tracker fund and the Invesco Perpetual UK Enhanced Fund, would not have been identified as trackers.
This may be due to the fact that most UK mutual funds are priced at midday, before their benchmark closes, and so the performance of both genuine and closet tracker funds will appear to differ from the index over the very short term, even if long-term performance is the same. It also said that a Financial Conduct Authority study in April, which concluded that five out of a sample of 23 UK funds were closet trackers, was “disgracefully small” and called for regulators to investigate further to protect the British public.