Date: 11th September 2020

Brussels, 11 September 2020 - On 10 October 2014, BETTER FINANCE wrote to ESMA[1] to ask for an investigation into the issue of falsely “active” funds, a practice also known as “closet indexing”. Today, it praises ESMA for its considerable efforts towards addressing the issue.

Indeed, on 9 September, ESMA published a Working Paper on “Closet Indexing Indicators and Investor Outcomes”, confirming findings from research also carried out by  BETTER FINANCE and pointing out that:

  • Potential closet indexers obtain significantly lower returns (gross and net) than active managers, potentially making them the worst performers on the market;
  • Although closet indexing costs less than active management, it is far more expensive than passive management (index tracking): “closet indexing funds face an unjustifiably high level of costs, far in excess of those for explicitly passive funds”.

Most importantly, ESMA now qualifies the practice of Closet Indexing as misconduct by asset managers, and, over the years, developed a “toolkit” that will allow it to engage in enforcement actions to address closet indexing: