20% of European large cap equity funds closet indexers – Morningstar

Data published by Morningstar in a report titled Active Share in European Equity Funds suggest that 20% of large cap funds examined qualify as so-called closet indexers – actively managed funds that mimic a benchmark while still charging higher active management fees.

But, the funds data and analysis provider adds that this proportion actually represents and improvement on recent years’ data.

The conclusion is based on research done by report authors, senior manager research analysts Mathieu Caquineau, Matias Möttölä, and Jeffrey Schumacher, who looked at active share data over 10 years, from 2005-2015 in the fund sedctor categories Europe Large-Cap Value Equity, Europe Large-Cap Blend Equity, and Europe Large-Cap Growth Equity. Together, these sectors encompass some 456 funds.

Report author Möttölä said: “Although we identified one in five European equity funds as a closet indexers,  our research shows that the proportion of closet indexers has been shrinking.”

“Average active share levels dropped considerably during the financial crisis of 2008 and 2009 but have been rising at a steady pace since then. In Europe we’ve witnessed increasing scrutiny from regulators in many countries, which could lead to structural change and less closet indexing in the market.”

“Investors who use active share as a fund selection tool should exercise caution. As active share increases, dispersion in returns and risk levels rises sharply, with both the best- and worst-performing funds found among the more active funds. It is the portfolio managers’ skill in selecting the right deviations from the index that generates outperformance. Among the least active funds, we found that almost all closet indexers underperformed their benchmark. If combined with high fees, such a fund is rarely a good choice.  Investors should compare fees carefully as funds with similar active shares can have fees that differ greatly. We believe active share is best used only in combination with other quantitative and qualitative tools.”

To view the full research report click here.

Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 17 years he has been based in London writing about funds and investments. From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope. Jonathan was awarded Editor of the Year at the Professional Publishers Association (PPA) Independent Publisher Awards 2017. Shortlisted for the same in 2016, he was also shortlisted in 2017 and 2015 for the broader PPA Awards category Editor of the Year (Business Media).

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