FCA under pressure to crack down on ‘closet trackers’

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The FCA faces mounting calls to crack down on so-called “closet trackers” after research revealed many funds are charging active fees for passive performance.

Research published by the European Securities and Markets Authority last week suggested between 5 and 15 per cent of Ucits funds across Europe were closet trackers.

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

Esma says it expects “fuller investigations on a fund-by-fund basis” from national authorities as part of their regular supervisory work.

An Esma spokeswoman says it will also assess “the need for further steps to ensure that all market participants” comply fully with disclosure obligations.

The FCA says the regulator is supervising all funds, not just those managed in relation to an index.

A spokesman says: “The clarity of fund descriptions was also an aspect of the recent meeting investors’ expectations thematic review, the results of which we will be publishing. Where we identify poor fund descriptions, we require them to be clarified.”

However, Axa Wealth head of investing Adrian Lowcock says the primary concern is over where firms are “consciously tracking the market”.

He says: “These funds are effectively charging active management fees for a passive return and need to be actively discouraged as they are ripping off investors and bringing the fund management industry into disrepute.”

But proving which funds are closet trackers and which are trackers through circumstance is difficult, he says. “It is not just a case of comparing performance, although the longer a fund has tracker-like performance the stronger the data is. Active share is one tool being promoted as a way of differentiating from a benchmark.

“A fund can be close to the benchmark in its allocation but still be active, it doesn’t need to be completely different to add value.”

Investment consultancy Gbi2 managing director Graham Bentley says the proportion of closet trackers in the UK could be significantly higher than the figures quoted by Esma.

He says: “In the UK you have so many funds in the All Companies sector and most of them are taking small bets around the benchmark and getting away with charging.

“Sooner or later, as more and more people buy passives, there has to be pressure on those funds either to be got rid of or an understanding what they are offering is not better than a tracker.”