Closet indexing


Posted by: Nicola Macdonald, on February 12, 2016.


You are probably familiar with the ‘Emperor’s New Clothes’, a short tale by Hans Christian Andersen about two weavers who promise an emperor a new suit of clothes that is invisible to those who are unfit for their positions, stupid, or incompetent. When the Emperor parades before his subjects in his new clothes, no one dares to say that he doesn’t see any suit of clothes until a child cries out, “But he isn’t wearing anything at all!”

What is the possible parallel with the investment management industry? Ever heard of closet indexing?  This is the process by which investors are unwittingly charged high fees by their fund manager for supposed ‘active’ management of their funds but in reality there is very little actual active management taking place.

Recent research by four prominent academics in Europe and the US showed that closet index tracking is prevalent in all of the world’s largest investment markets, including the US and the UK.

Journalist and Broadcaster Robin Powell has recently written a really thought provoking short article on this subject:

 

It’s time to tell the closet indexers, see you in court.

 

He highlights how in Europe, only the regulators in Sweden and Norway have really started to address this hugely important issue, but we agree with Robin that more action is required.

If you have any doubts that your current investment manager is simply offering you a very expensive index fund and you may be wasting thousands of pounds investing in what Robin describes as ‘fake goods’, please contact us at uckfield@swindellsfp.co.uk or 01825 763366.



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