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‘ESMA underestimates closet tracker problem’

The European Securities and Markets Authority’s (Esma) investigation into funds marketing themselves as active but in reality are passive, or ‘closet trackers’, underestimates the extent of the problem, according to UK investment boutique SCM Direct.

Expert Investor


Kirsten Hastings

In February, a study undertaken by Esma found that up to 15% of large, actively managed Ucits equity funds are potentially just tracking the underlying market index.

Esma research

The Esma study looked into equity funds domiciled in EU member states that were not categorised as index tracking Ucits. They had to have assets under management of more than €50m, have an inception date before 1 January 2005, and management fees of more than 0.65%.

It found more than 2,600 Ucits that met the criteria and was able to retrieve data for 1,251 Ucits sub-funds for the period 2012-2014.

Esma said that of the funds where less than 60% of the holdings differed from the benchmark, and which have a less than 4% tracking error, 15% could be classified as potentially being closet indexers.


However, when SCM applied the same parameters to a test sample of genuine index tracking funds, they found that a number of the funds were not flagged up as trackers.

“It is our conclusion that there may be a fundamental issue with the Esma tests regarding the pricing of retail funds,” SMC said.

The company attributed the difference to the fact virtually all mutual funds are priced at 12pm, before the benchmark closes. As a result, the performance of genuine index tracking funds, as well as closet tracking funds, appears different to the benchmark.

Materially underreported

Gina Miller, co-founder of SCM, told the Financial Times: “The Esma tests materially under-reported the levels of closet indexation. There may be a fundamental issue regarding the pricing of retail funds that means the tests are prone to misleading results.”

In response, Esma said the purpose of its analysis was only to determine “whether there was any indication of closet indexing at an EU-wide level”.