Asset managers named in list of potential closet trackers

12 February 2017

Schroders, Fidelity International, JPMorgan, Henderson and Amundi have been named in a list of 80 investment companies that have potentially sold funds that charge high fees for active management but closely mimic their benchmark.

Better Finance, the influential investor campaign group that compiled the list, replicated an investigation by the European markets watchdog last year, which found that up to a sixth of actively managed equity funds sold on the continent potentially overcharged investors.

The European Securities and Markets Authority refused to name the companies it identified as selling potential closet-trackers, funds that charge a premium for their investment expertise but only narrowly diverge from their benchmark. This prompted Better Finance to expose the asset managers found to have sold index-hugging funds.

According to the campaign group, Fidelity International, JPMorgan, Amundi, Schroders and Henderson - five of the world's largest asset management houses - each oversee billions of euros in funds that could be classed as closet trackers.

Leading academics and investor rights organisations have long argued that consumers who bought closet-tracking funds have overpaid significantly for active management when they would have been better off purchasing a cheap index tracker.

An emerging market fund run by Amundi, which was highlighted by Better Finance as one that closely mimics its benchmark, charges almost 10 times more than an equivalent index-tracking fund managed by Vanguard, the low-cost US asset manager.

Gina Miller, co-head of SCM Private, the investment boutique, and a campaigner against hidden fees, said: "We have been shouting about the scandal of closet index tracking, which is plainly mis-selling, for years, so I am delighted to see Better Finance naming and shaming the worst offenders."

Better Finance said it examined the performance of 1,013 European equity funds in the five years to the end of 2014, and found 165 of them were "potential closet index funds".

Guillaume Prache, managing director of Better Finance and a former policy adviser to Esma, urged the watchdog and national regulators to scrutinise the highlighted funds and investigate whether their fee structures were appropriate.

He said: "We had to publish the names; investors need to know this information so that they can make decisions based on it. This now puts pressure on national regulators to act, and for the asset managers involved to explain their position."

Funds were identified as potential closet trackers if they had an active share of less than 60 per cent and a tracking error of less than 4 per cent - metrics that show to what extent a fund's constituents and performance differ from its benchmark. Esma used the same metrics in its investigation.

Better Finance spent €30,000 commissioning Fideres, an external consultancy, to carry out the study.

A spokesperson for Fidelity International, which had nine funds in the Better Finance list, including a £1.6bn Luxembourg-based product, said: "Active share and tracking error are both useful tools in measuring how different a portfolio is from its benchmark, but in our view these should not be the only lens through which investors judge a fund."

The company said investors should consider other metrics, including manager record, access to research and fund manager remuneration. It added that many of the funds included in the list invested in large-cap indices, where "achieving a high active share is more difficult".

"We also note that the data used to compile the list is looking at the period from 2009-14. This would include the period immediately after the financial crises and an industry-wide pullback in investor risk appetite. With liquidity a prime concern, small-cap positions were cut back with the effect of reducing active share levels," he added.

A spokesperson for JPMorgan, which had seven funds in the list, including three with more than €1bn of assets, said the products had delivered "strong returns for investors for the level of risk taken".

Schroders, the UK's largest listed asset manager, which had three funds named in the list, including a $2.3bn product registered in Luxembourg, questioned the accuracy of the data.

The UK asset manager said two emerging market funds included in the list had an average active share of 61.6 per cent in the period to the end of 2014, whereas Better Finance said their active share was closer to 58.5 per cent.

A spokesperson for Schroders said: "We believe active share is only one of many measures that investors can use to judge the level of active management. Our funds are designed for long-term performance to help our clients meet their financial goals."

Regulators in the UK, Germany, France, the Netherlands, Italy and Sweden launched national investigations into closet tracking after Esma published its findings last March.

The Swedish regulator said last year that more than a dozen asset managers, including Swedbank Robur, SEB, Handelsbanken, Skandia and Danske Invest, had sold funds with a very low active share and tracking error, but stopped short of calling them closet trackers.

The French regulator concluded there were no instances of closet tracking in its home market, while the UK regulator found that more than £100bn of British investors' money was in funds that closely hugged their index.

The German regulator has introduced new rules for asset managers, requiring them to explain more explicitly to investors whether a fund is managed actively or passively. BaFin found only "a few individual cases" where active funds closely mirrored a benchmark after scrutinising 290 equity funds.

Amundi and Henderson declined to comment.

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