One in 7 Ucits funds are closet trackers, finds ESMA


Up to 15 per cent of Ucits funds are closet trackers and further work by the FCA is needed, finds the European Securities and Markets Authority.

Research by ESMA of Ucits funds across Europe found that between 5 and 15 per cent of the funds it examined are closet trackers, but charging active management fees.

It assessed 1,251 equity funds and their performance between 2012 and 2014, using the measures of active share, tracking error and R-squared to determine how much the funds were deviating from the index.

It found that 15 per cent of funds had an active share of less than 60 per cent and a tracking error of less than 4 per cent, meaning they were classed as closet trackers.

ESMA also found 7 per cent of funds had an active share of less than 50 per cent and a tracking error of less than 3 per cent, while 5 per cent of funds had active share of less than 50 per cent and a tracking error of less than 3 per cent and an R-squared of more than 0.95. All falling into this criteria were classed as closet trackers.

“The results of the study underline the need for additional supervisory work in this area,” says ESMA in a statement.

The research looked at funds with assets under management of more than €50m (£38m), that were launched before January 2005 and charged management fees of more than 0.65 per cent.

ESMA says further analysis is needed at national level. “ESMA and national competent authorities have committed to additional work on potential closet indexing,” says the regulator.

“This will include an active role for ESMA in the coordination of further analysis carried out at the national level, while fuller investigations on a fund-by-fund basis will necessarily fall in the remit of national competent authorities, as part of their regular supervisory work.”

It added that in many member states, local regulators have launched or are in the process of launching specific investigations.

ESMA says it is concerned investors are being misled into paying active fees for closet trackers, and that they may be exposed to a different risk-return profile than they expect. It has also warned that some managers are not giving clear descriptions of how funds are managed in the fund’s prospectus and KIID.

“Managers should expect supervisory consequences where evidence for incorrect disclosures is proven,” ESMA says.