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Premier research: UK equity investors risk losses in ‘closet trackers’

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Written by:
24/11/2014
Some 30% of money held in the IMA’s two main UK equity sectors is stuck in so-called 'closet trackers' - funds that charge active fees, but stick close to the index, according to new research by Premier Asset Management.
Premier research: UK equity investors risk losses in ‘closet trackers’

These funds, which hold a total of £58bn in assets, charge active fees, but are performing no better than tracker funds, and therefore often performing worse due to higher fees.

Premier has calculated the average weighted annual ongoing charge of these funds is 1.43%, only marginally lower than the 1.55% paid for the market’s most expensive funds, but well above the 0.61% charge of the average tracker product.

Meanwhile, funds with a highly active share – defined by Premier as funds deviating from the index by 80% or more – have significantly outperformed the market over the past decade, justifying the higher fees they charge.

Over the current market cycle, Premier has calculated highly active funds have outperformed closet trackers by 2.9% a year; but even genuine tracker funds have managed to outstrip them by 0.3% a year due to the lower fees they charge.

Simon Evan-Cook (pictured), senior investment manager who conducted the research, said: “Closet trackers are classed as fully active funds in statistical studies. Given they are all-but-a shoo-in to underperform the market by even more than genuine trackers, they inevitably drag the performance of the ‘average’ active fund down. It is like trying to calculate the average fuel efficiency of cars in the UK, but including lorries in your study.”

Evan-Cook used the active share measure to differentiate the funds, classifying funds with an active share below 60% as genuine or closet trackers, where genuine trackers have a typical active share below 15%. Funds with active share between 60% and 80% are classed as active, while those above 80% are highly active.

The UK equities sectors had the higher proportion of closet trackers, double the amount of those found in the next worst sector – Global Emerging Markets – where only 15% of funds were not active enough to justify higher fees.

Across the six sectors the research covered, 76% of the money held in closet trackers was in UK equity funds, despite the fact they only make up 8% of the global stock market.

If investors in all these closet UK equity trackers switched to the cheapest genuine tracker fund in the market, with an ongoing charge of 12bps, they could save upwards of £756m in aggregate, the research shows.

Evan-Cook concluded: “Critics of active investing have long maintained it is too hard to pick a good active fund. But this shows how easy it is to immediately avoid most of the weaker funds that drag down the ‘average fund’ statistics.”

Click here for the full report: Kill the Filler

Annualised Total Return in IMA UK Equity sectors

  10 yrs 5 yrs 3 yrs 1 yr
Highly Active 10.3% 14% 15.7% 2.1%
Active 9% 11.2% 13% 1.5%
Tracker
(under 50bps)
7.8% 9.7% 10.4% 0.9%
FTSE All Share 8% 10% 10.8% 1%
Closet tracker 7.6% 9.9% 11.1% 0.8%
Tracker
(over 50bps)
6.9% 8.6% 9% -0.1%

Source: Premier Asset Management / Morningstar

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