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Envy — Imitating the index is the poorest form of flattery

By Mike Turner, Investment Solutions, Aberdeen Asset Management

This article expands upon the sixth of Mike Turner’s Seven Deadly Sins, which was first published in booklet form in January 2014.

When shopping for a product, you expect it to do what it says on the tin. The idea of ‘what you see is what you get’ is a central tenet of the unwritten contract between a firm and its customers. If you bought a pair of award-winning headphones and arrived home to find they did not play any bass, you would undoubtedly be frustrated and feel that you had been mis-sold. Unbeknown to many, something very similar is happening in parts of the active fund management world.

Traditionally, active funds — which are intended to achieve returns in excess of their benchmarks — charge higher fees than passive funds, which simply track an index or benchmark. The problem is that many of these supposedly ‘active’ funds are not active at all — they are essentially ‘benchmark-hugging’ funds or ‘closet trackers’. A recent study found that around one in three actively managed UK equity funds are closet trackers. These funds charge more than cheap passive trackers but have similar holdings and performance. In March 2015, Norwegian regulators became the first to order a bank to lower the fees on one of its active funds because performance was very close to the benchmark.

So how have closet trackers come about?

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