BETTER FINANCE was mentioned in several articles covering the story by Reuters on Closet Index Trackers.
Reuters & Yahoo Finance: "EU watchdog considers action against "closet" tracker funds."
Closet Indexing Finally on ESMA’s Radar?
For years now the active management of investment fund portfolios has suffered negative criticism with financial headlines relegating the failing practice to the dustbin of history. Following years of persistent failure by the majority of fund managers to outperform the market, the evidence in favour of index investing - also known as “passive” - is building up.
Active management investment companies believe it's possible to outperform the market and produce better returns than passively managed index funds. However, bar a few exceptions, actual results tend to demonstrate that with high fees, scarce talent and intense competition, it is virtually impossible for active managers as a whole to outperform indexing in the long-term.
Since there’s a lot more money to be made from active management than from indexing, advisors and managers continued to spin the truth for years. But with increasing evidence illustrating the actual performance of active management, fund managers had to turn to other tactics to justify the high fees.
Many turned to indexing and large financial institutions have steadily reduced fees by offering and promoting exchange-traded funds (ETFs) that track indices. Other managers refused to relinquish their high fees and started resorting to underhand practices such as “index hugging”, allowing them to limit the risk of underperformance by clinging to the index. Obviously these “closet index huggers” do not advertise the fact that, for all intents and purposes, they are charging “active management” fees for what is essentially passive management.
BETTER FINANCE repeatedly denounced this practice and in October 2014 and lodged a request with the European Securities and Markets Authority (ESMA) for “closet indexing” to be properly investigated. Now, nearly a year and a half later, ESMA published a statement providing details of its work on closet index tracking funds.
Following research on a sample of 2,600 funds, out of a total of 29,000 European UCITS funds, Steven Maijoor, ESMA Chair, said that "closet indexing is an issue which has attracted the attention of investor protection groups and investors alike throughout the European Union and ESMA has played a key role in an EU-wide inquiry to get to the heart of the matter".
BETTER FINANCE intends to maintain pressure on ESMA. It believes national regulators in Europe's largest fund domiciles have been slow to act and wants ESMA to use its powers to suspend or ban products that have been identified as closet indexers, since the issue is highly detrimental to investors and cannot wait for national authorities to step in and enforce compliance with EU law.
Importantly, by excluding assets under management of more than € 50mn, BETTER FINANCE believes that ESMA may be excluding a significant part of the smaller and worse performing investment funds which are typically sold to retail investors in the EU, therefore underestimating the real extent of the problem.
Fund fees in general in Europe are too high. Actively managed equity funds typically charge 1.70 per cent in fees, compared with 0.70 per cent for equivalent products in the US. Currently ongoing research by BETTER FINANCE on the relatively new phenomenon of Robo-Advisors, confirms this trend. The research on Robo-Advisors will be announced shortly.