Funds News

EU watchdog considers action against "closet" tracker funds

LONDON (Reuters) - The European Union’s securities regulator is looking at what action to take after finding that up to 15 percent of actively managed funds may be misleading investors by covertly tracking a stock index.

Traders work at their desks in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, February 1, 2016. REUTERS/Staff/Remote

It is the latest blow to the asset management sector where regulators are also scrutinising fees at a time cash-strapped governments want people to save more for their retirement.

Consumers have long suspected some of the funds that charge them higher fees to scour the market for the best picks may in reality be “closet” trackers that mimic the performance of stock indexes.

Actively managed funds charge fees that are multiples of those charged by trackers.

After calls in 2014 from EU investor lobby group Better Finance, the European Securities and Markets Authority (ESMA) studied a sample of 2,600 funds over 2012-2014.

The watchdog said on Tuesday it had found that 5 percent to 15 percent of UCITS equity funds could potentially be closet indexers.

UCITS (Undertakings for the Collective Investment in Transferable Securities) are EU regulated funds touted by Europe as the “gold standard” of mutual funds globally. There are 29,000 UCITS holding 9 trillion euros ($9.8 trillion).

“Investor protection is core to our mission and the preliminary findings raise questions that merit closer analysis,” ESMA Chair Steven Maijoor said in a statement.

“In partnership with national regulators we are taking a closer look at this issue,” Maijoor said.

The EU watchdog and its counterparts in the bloc’s 28 member states will determine “further actions”, based on fuller investigations on a fund-by-fund basis, ESMA said.

Regulatory action in the funds sector touches on political sensitivities as EU policymakers look to asset managers to invest in infrastructure such as roads and digital networks to help boost a sluggish economy.

ESMA has no powers to take enforcement action but can put pressure on national regulators to act.

The watchdog could recommend that the bloc’s executive European Commission proposes changes to EU laws that underpin UCITS and consumer protection in financial services.

Funds could be asked to give more detailed disclosures to investors.

ESMA’s study looked at the so-called active share metric of funds, or to what extent their stock picks overlap with an index.

Academics have said an actively managed fund should be at least 60 percent different from an index to be genuinely active, and inserting a requirement to disclose the active share metric could be one option for ESMA.

($1 = 0.9164 euros)

Editing by David Clarke