European closet tracker funds report reveals up to 165 offenders

European closet tracker funds report reveals up to 165 offenders

Some of the asset management industry’s best known names have been named in a list of investment companies that have potentially sold funds that charge high fees for active management, but closely mimic the benchmark.

Investor campaign group Better Finance has compiled a list, of so-called ‘closet trackers’ in a report that aims to replicate an investigation by the European Securities and Markets Authority.

ESMA originally reported the results of its research on closet indexing equity funds conducted from 2012 to 2014, where it studied a sample of 2,600 funds to find any indication of closet indexing at a European level through quantitative metrics and documents reviewing.

Without naming any manager, the institution said that it found out that between 5% and 15% of the UCITS equity funds scrutinised could potentially be closet indexers.

All funds monitored had assets under management of more than €50m, were launched before 1 January 2005, and had management fees of more than 0.65% of the net asset value (NAV) of the fund.

Euro-wide regulator investigations

The UK financial services regulator, The Financial Conduct Authority, is conducting an investigation into the rise of closet trackers and a number of local European regulators have followed suit and conducted investigations, including Germany, Italy, Sweden and Norway.

Following ESMA’s study, French regulator AMF assessed that the France-domiciled funds presented as closet trackers were not. It said quantitative metrics used for ESMA’s research were not enough to enable closet-tracker claims.

In its report, Better Finance revealed that it studied a sample of 2,332 UCITS equity funds from Morningstar database.

The association has found out 57% of UCITS equity funds cannot be analysed either because they haven’t reported a benchmark on their prospectuses or do not provide enough information for Morningstar to compute metrics applied by ESMA.

Among the remaining funds for which Better Finance has been able to apply ESMA’s methodology, the association has found out 36% (848 funds) of all funds do seem to be truly active.

165 funds

“Up to 7% of all funds and up to 16% of sufficiently transparent funds (165 funds) show characteristics that flag them as being potential closet index funds according to ESMA (active share below 60% and tracking error below 4%); for example, 46.4% of those funds are domiciled in Luxembourg, 7.8 % in Ireland, 7.2% in the UK and 15.7% in France,” Better Finance reported.

The association said that an addition review of investor disclosure documents revealed that more than a third (34%; or 21 funds out of 62) of the funds with the highest potential of being closet indexers according to ESMA (active share below 50%, tracking error below 3% and R square above 0.95%) do not disclose their benchmark’s performance alongside their own performance in their KIID.


Better Finance specified that most of those funds “seem to have underperformed their benchmark over the last five years.” The investors’ association has called ESMA and national regulators to provide more transparency on funds’ metrics and to expand their investigations to the majority of EU domiciled active equity funds, including those that were not analysed by ESMA.

Better Finance also asked asset managers that ESMA and the association suspect running closet indexing equity strategies to provide clear reasons for charging “active” fees (from 0.75% to 3% per annum) to investors instead of traditional index ETF funds’ fees of between 0.05% and 0.30%.

‘Walk the talk’

Guillaume Prache, managing director of Better Finance, said: “Restoring savers’ and investors’ confidence is key for growth and jobs in Europe as highlighted by the EU Authorities. Let’s walk the talk.

“These findings are further clear proof that EU regulators must not eliminate the standardized and supervised disclosure of the long-term and relative past performance of retail investment products to their benchmark, as they unfortunately plan to do in the implementing rules for PRIIPs.”