French financial market authority AMF has proposed an alternative approach to identify so-called closet tracker funds, referring to ‘active’ funds charging high fees but whose portfolios resemble much to indices.
AMF says its method adopts a return-based approach and aims at differentiating from the ‘active share’ methodology most commonly used in Europe (comparative analysis of a portfolio and index’s composition).
“By using market data solely, this method can be applied to a broader sample and aims to measure the degree of relative activity within a given fund population and its persistence over time. The method is applied to test a sample from between 2006 and 2016 of nearly 800 French funds invested in European equities,” the French regulator explained.
“Since the adopted identification criteria are intentionally unrestrictive in order to minimise the risk of false negatives (the risk of a fund going undetected), this has led to the flagging of a significant number of funds. On the other hand it should be noted that not all funds flagged are to be considered as potential closet index funds.
“The proposed method, as with all other methods, does not make it possible to dispense with an in-depth individual analysis by the regulator. The applied method allows the least active funds to be identified within a given population, but in any case it does not provide a basis to conclude in absolute terms, that those identified are indeed closet index funds,” AMF argued.
The French regulator added that it intends to pursue its research work and considers extending its work to cover a broader sample of European funds.
“The possible existence of closet index funds, is an important matter for financial regulators, including the AMF, both in terms of financial information and investor protection,” it said.
More about AMF’s methodology on finding closet trackers: Closet Index Funds_ a contribution to the debate in Europe.