Italian closet trackers sanctioned by regulator
The Italian regulator has taken action against some of the largest investment companies in its home market for mis-selling actively managed funds that closely hugged an index.
Consob, the Italian finance watchdog, investigated the 10 largest domestic asset management companies over concerns they were selling funds that charged high fees for active management but simply following an index.
The practice, known as closet tracking, has caused controversy throughout Europe over the past 12 months. A number of national regulators discovered a high proportion of actively managed funds tend to mimic an index.
This is regarded as a harmful form of mis-selling that has left millions of investors significantly worse off than if they had bought a cheap index fund in the first place.
A spokesperson for the Italian watchdog said it took “remedial action” against a number of the companies it examined.
It declined to name which companies were affected, but said they were made to change their fund documents to ensure “the investment policy description [was] consistent with the management style actually adopted by the manager”.
The Italian regulator plans to carry out another investigation into closet tracking in the coming months, partly in response to research published last month by Esma , the European markets watchdog, examining the issue.
Esma found that between 5 and 15 per cent of actively managed equity funds in Europe could be closet trackers, but said it was the responsibility of national regulators to identify and sanction problem funds.
Research published last week by Morningstar, the data provider, showed Italy has the highest rate of closet tracking of all European countries.
Two-thirds of fund assets in Italy have an active share — a measure of how much an equity fund’s holdings differ from its benchmark — of below 60 per cent over the past three years.
The 60 per cent threshold is widely considered in academic circles to be the lowest acceptable level of active share for an actively managed fund.
Morningstar also found that a fifth of supposedly active equity funds across Europe failed to reach this threshold, implying the extent of the closet tracking problem could be much worse than Esma suggested.
Matias Möttölä, senior research analyst at Morningstar, said: “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.”