Closet trackers could be costing UK investors £1.8bn

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Closet trackers could be costing UK investors £1.8bn a year by selling passive funds disguised as actively managed funds.

More than a quarter (26 per cent) of funds sold in the UK are “closet indexed”, according to figures published in the Journal of Financial Economics.

Investors lose out by being charged costs for active management when they could achieve the same performance with a passively managed fund. This can be the difference between 1.25 per cent of the fund’s value for active management fees compared to 0.5 per cent for passive.

Earlier this month the FCA warned a number of asset managers have failed to disclose closet tracker funds, while others did not have clear descriptions of funds.

Of the 23 funds and four segregated mandates from 19 asset managers that the FCA examined, seven KIIDs didn’t have “clear descriptions” of how they were managed, while five funds used a benchmark-related approach that was not disclosed.

Closet tracking gives the fund management industry a bad name, says Roberto Rossignoli, portfolio manager at robo-adviser MoneyFarm. “It is absolutely essential that the fund management industry builds a culture of transparency in order to ensure that investors or savers are able to fully trust their financial advisers.”

Rossignoli added: “Closet indexing is like selling someone a Ferrari that has been fitted with a Fiat engine – without telling them.”