“There is less value dispersion within equity markets generally, except for the resource sectors, which have had a torrid time and are looking cheap relatively,” he says. “However, as the fortunes of these areas of the market are largely out of their control many managers are avoiding these areas, despite current valuations. Within the UK the mining and oil and gas sectors still make a sizeable weight and if managers are avoiding these areas then their funds will display less beta.
“Another factor could be costs. The industry has become very cost conscious and this has seen a rise in the demand for passives. As such, investors are not prepared to pay up for actively managed funds that are actually closet trackers.
“This is why we have seen active share come to the fore, so that investors can appreciate the fund is being actively managed compared with the broader market/benchmark, and therefore justify higher costs. This could also be a contributory factor for a change in management style.”
| What to look for |
The European Securities and Markets Authority (ESMA) released its own report into closet indexers, using a number of metrics, including a similar combination to the Investment Adviser research of an R-squared figure above 95, an active share below 55 and a tracking error of less than 3 per cent. This suggested potentially 5 per cent of the sample of 1,251 Ucits funds could be closet indexers. But while the issue is becoming more prominent, more still needs to be done, with Better Finance, the European Federation of Investors and Financial Services Users, calling for organisations such as ESMA to name the funds that fall into these closet indexer metrics. 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.” |
Darius McDermott, managing director of Chelsea Financial Services, notes the falling numbers indicates closest trackers may be less of an issue than people think, but notes that while more active managers are talking about their active share, the underlying investments are key.
“High active share doesn’t necessarily translate to higher performance if the stocks are bad. When it comes to the reduction in number [of closet trackers], it’s unlikely to be a particular sector such as mining. It is perhaps more due to the fact that mega caps are out of favour, and if managers are avoiding these their active share will rise immediately.”
