The number of potential closet trackers identified by Investment Adviser research has declined substantially in the past 12 months, from 15 in 2015 to just four.
Research into closet trackers has grown more popular, with Morningstar recently releasing a study of the active share of European large-cap funds between 2005 and 2015 that shows 20.2 per cent are so-called ‘closet indexers’ with an active share of less than 60 per cent. But it notes the proportion of closet indexers has been falling in recent years.
What could be the causes of this decline?
Tom Poulter, investment research analyst at Square Mile Consulting, suggests there could be a number of reasons. One possible factor could be differences in the timing of the pricing of indices and passive funds – intraday or end of day – that can create considerable differentiation in tracking errors, which could affect the cut-off point for identifying closet trackers.
Another possible driver is the volatility in sectors, such as resources, that has caused managers to avoid these areas and therefore increase their active share.
Arnaud Houdmont, chief communications officer at BETTER FINANCE, says: “Regulators need to publicly disclose those funds that are marketed and priced as being actively managed but that in reality merely hug or shadow an index. Fund providers need to provide more information on the funds’ performances against their respective benchmarks.
“Funds whose performance does not deviate from their benchmarks should clearly be labelled as passive and fund providers should adapt fees accordingly.”
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