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European regulator issues ‘closet trackers’ warning


The FCA is being urged to scrutinise Ucits funds after research by an influential European regulator revealed up to 15 per cent are “closet trackers”.

Research by the European Securities and Markets Authority of Ucits funds across Europe found between 5 and 15 per cent of the funds it examined are closet trackers, but charging active management fees.

Closet trackers are defined as funds with an active share of less than 60 per cent and a tracking error of less than 4 per cent.

Esma assessed 1,251 equity funds and their performance between 2012 and 2014, using the measures of active share, tracking error and R-squared to determine how much the funds were deviating from the index.

Esma also found 7 per cent of funds had an active share of less than 50 per cent and a tracking error of less than 3 per cent, while 5 per cent of funds had active share of less than 50 per cent and a tracking error of less than 3 per cent and an R-squared of more than 0.95. All falling into this criteria were classed as closet trackers.

Esma says: “The results of the study underline the need for additional supervisory work in this area.”

The research looked at funds with assets under management of more than €50m (£38m), that were launched before January 2005 and charged management fees of more than 0.65 per cent.

Esma says further analysis is needed at national level.

It says: “Esma and national competent authorities have committed to additional work on potential closet indexing.

“This will include an active role for Esma in the coordination of further analysis carried out at the national level, while fuller investigations on a fund-by-fund basis will necessarily fall in the remit of national competent authorities, as part of their regular supervisory work.”

It adds that in many member states, local regulators have launched or are in the process of launching specific investigations.

Esma says it is concerned investors are being misled into paying active fees for closet trackers, and that they may be exposed to a different risk-return profile than they expect.

It has also warned that some managers are not giving clear descriptions of how funds are managed in the fund’s prospectus and KIID.

“Managers should expect supervisory consequences where evidence for incorrect disclosures is proven,” Esma says.


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  1. It’s news to me that it’s a crime to run a closet tracker. People in financial services seem to forget that overcharging is not illegal.

    It is much better to be in a closet tracker than in a fund run by a manager with an over-inflated sense of his own ability. A closet tracker will at least track the growth of the index, albeit it will return a bit less than a cheap genuine tracker. Not the case if a manager, in his eagerness not to be a “closet tracker”, invests large amounts of money in stupid “best ideas” and leaves investors nursing large losses, eventually to be quietly merged into another fund.

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