The European Union's securities regulator is looking at what action to take after finding that up to 15 percent of actively managed funds may be misleading investors by covertly tracking a stock index.
Indeed consumers have long suspected some of the funds that charge them higher fees to scour the market for the best picks may in reality be "closet" trackers that mimic the performance of stock indexes.
After calls from BETTER FINANCE, complaining that funds were charging high fees for active management whilst in reality they were simply mimicking an index, the European Securities and Markets Authority began an investigation of the asset management industry in 2014. To this end ESMA analysed a sample of 2,600 funds between 2012 and 2014 and identified “between 5 per cent and 15 per cent of equity funds across Europe” as potential closet indexers.
"Investor protection is core to our mission and the preliminary findings raise questions that merit closer analysis," ESMA Chair Steven Maijoor said in a statement. The watchdog could recommend for the European Commission to propose changes to EU laws that underpin UCITS and consumer protection in financial services. Funds could be asked to provide more detailed disclosures to investors.
Academics have said that an actively managed fund should be at least 60 percent different from an index to be genuinely active, and inserting a requirement to disclose the active share metric could be one option for ESMA.
At this stage ESMA is not disclosing the potential culprits, thereby drawing criticism from consumer protection groups that argue that keeping the list of funds secret is detrimental to investor protection. The scale of the problem could also be far worse than initially thought.
Juan Manuel Viver, policy officer at BETTER FINANCE believes that ESMA should be forced to act on the findings rather than pass responsibility on to national regulators.
“It is not reasonable that once ESMA says that up to 15 per cent of active funds could be closet trackers, nothing happens, and that investors have to wait until national regulators take action,” he said. “This is not only detrimental for the investor community but to the fund management industry in general.”
As part of its investigation, ESMA looked at funds with more than €50m of assets.
Mr Viver added that by filtering out funds with fewer assets, ESMA could be excluding “a significant part of the smaller and worse-performing investment funds” and “underestimating the real extent of the problem”.
Following the news, Aberdeen Asset Management, Europe’s third-largest fund house, is cutting fees on one of its emerging markets funds. The fund house said its decision to reduce the fees on its Aberdeen Worldwide Emerging Markets fund was “completely separate” from this EU investigation on closet indexing.
BETTER FINANCE commented: “The distribution of such funds as active funds is merely misleading to the investor and creates detriment because the investor is paying for a service that he is not receiving in any case.”
Aberdeen’s spokesperson said its emerging markets fund is one of a “small number” of former Swip products that use quantitative techniques as part of their investment strategies, meaning the investment decisions are determined by numerical methods rather than human judgment.
The fund house, which is currently writing to clients to inform them about the changes, declined to reveal the fund’s new fee. It will be introduced in the “next month or two”.
Please read the full articles here:
- Reuters : EU watchdog considers action against "closet" tracker funds
- Financial Times : ‘Name and shame’ closet trackers, European regulator told
- Financial Times : Aberdeen cuts fees on emerging markets fund
- Financial News :Fight to expose 'closet trackers' intensifies amid EU concerns