Following the European Securities and Markets Authority’s (ESMA) definition of what a closet tracker fund is (essentially a fund that charges high active fees just to replicate an index) the Central Bank of Ireland has identified 182 funds it feels fit this description.
The Irish regulator looked at 2500 active UCITS funds and by using a set of criteria ESMA had laid out decided which funds needed attention for potentially being closet index trackers.
This follows from the UK’s regulator, the Financial Conduct Authority (FCA), forcing asset managers to pay compensation to investors for failing to disclose how close to the index their funds were.
Patricia Dunne, head of Securities and Markets at the Irish regulator, said in a letter that the body had already contacted 62 of the 182 fund providers who will have until 31 March 2020 to update their prospectus and Key Investor Information Documents (KIID).
One of the reasons regulators have been targeting these funds is that after active fees, investors cannot expect to outperform. One of the key findings of the Bank of Ireland was that: “Instances where the fund had a target outperformance against an index that is less than the fee charged to certain share classes in the fund. The result is that even if the UCITS provides a return at the upper end of its projections, investors in these share classes will not realise a positive return against the benchmark, as the fee charged will cancel out any outperformance achieved.”
Director General Derville Rowland said in a statement: :”This represents our largest data driven review of the funds industry to date and we will follow through with each individual fund where we had findings.
“Investors in UCITS have a right to rely on the information in the Prospectus and the KIID and funds have an ongoing duty to ensure that this information is accurate and that the fund is managed in investors’ best interests.”
The decision not to name those it suspects of overcharging for an index fund, the ultra-low cost way of investing made famous by the late John ‘Jack’ Bogel who created Vanguard, follows in the footsteps of the FCA last year. As these funds have made failures to declare their similarities to the benchmark in their supporting documentation, it might be considered a genuine oversight which has made regulators reluctant to name and shame.
The Central Bank also raised concerns about poor governance on boards and supporting documentation that lacked benchmarks in the past performance section, in a fund’s KIID for instance.
