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'Closet trackers' under fire for short-changing savers

Regulator highlights concerns over funds which purport to offer active management but deliver returns even worse than a passive investment.

 
'Closet trackers' under fire for short-changing savers

Fund managers are facing mounting pressure over 'closet trackers', funds that purport to offer active management only to closely track their benchmark and deliver returns even worse than a passive investment.

City regulator the Financial Conduct Authority has highlighted its concerns in a paper whose main purpose was to launch a review of investment banks, but which also looked at the fund management services provided to big pension funds.

'It is possible that "closet tracking" could be indicative of market structures which have allowed asset managers' and investors' incentives to be misaligned,' it said.

Closet trackers typically perform worse than passive funds, even though they stay close to their benchmark, due to their higher costs.

The FCA said a review of fund managers' incentives to control costs could form part of a wider probe of fund managers and the services they provide big company pension funds.

'We believe that there are areas of this market where competition may not be working effectively,' it said. 'Given the size of this market even a small improvement in the effectiveness of competition could lead to a substantial benefit to investors.'

It added that it supported European regulator the European Securities and Markets Authority's work to tackle closet trackers.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the online stockbroker's research into pension funds showed that closet tracking was 'fairly standard in the [pensions] industry', particularly where employees were put in 'default' funds when they did not choose other funds. 

'The prevalence of closet trackers in pensions is testament to an industry that has relied for too long on lacklustre default funds, and which has done little to help savers to make their own decisions,' he said.

'Now investors need to take matters into their own hands, and vote with their feet, if they are invested in a closet tracker fund.'

The Financial Services Consumer Panel has previously called on the regulator to require fund groups to show the degree of their active management.

Some fund groups have sought to counter concerns over closet tracking by publishing the 'active share' of their funds. This measures how many of a fund's holdings, and their size, differ from those that make up its benchmark: a higher 'active share' indicates a greater degree of active management.

But the pressure placed on UK fund groups over closet trackers pales in comparison to that faced by their counterparts in Sweden. The Swedish government this week said it would investigate these funds, after a shareholder group launched a class-action lawsuit against the country's second-biggest fund manager. 

9 comments so far. Why not have your say?

RippedOff

Feb 20, 2015 at 17:08

This is plain stealing by the fund managers involved.

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White Stick follower

Feb 20, 2015 at 18:11

Can't disagree. When my wife complained about poor performance and management charges;and asked for an explanation of what the fund managers were doing for their charges all she got was a 'bog standard' letter saying 'funds go up and go down'. 'You need to understand that this is a long term investment' and basically 'it'll be all right in the end', but the values continue drop and there are Exit penalties so she can't get out without losing a chunk of money. In the face of poor performance she received a booklet about how to complain to the Ombudsman - but, of course, the Ombudsman won't consider complaints of poor performance. As for the endlessly recommended 'consult an IFA' well he lost interest as soon as the money was invested, & his explanation despite his powerful recommendations, is that 'these things happen and can't be foreseen'. But all of the 'suits' are happily taking their charges and trail commission for doing nothing, so its money under false pretences.

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Tony Peterson

Feb 20, 2015 at 19:46

Nothing beats "doing it yourself" in the investment world.

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colin overton

Feb 21, 2015 at 08:54

Never get trapped in an investment you can't change. If an investment is under-performing over a reasonable time period then move your money. The golden rule is don't complain, move!

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White Stick follower

Feb 21, 2015 at 11:37

Difficult to do when an IFA, from a leading company, provides his 'expertise' and advice and ties you into a 20-year product with, as we now know, no 'get out of jail' clause - unless you pay whatever the Insurer decides is appropriate. Trust an IFA? Why when all he seems to have focussed on was the 7% commission, and trail commission, not mentioned 14 years ago. Yes we get income but the assurance that the Plans would maintain their value was inappropriate- only 1 of 3 has just about managed it, 1 has slipped by about 25% and the third is a disaster now worth less than 50% of the initial premium

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colin overton

Feb 21, 2015 at 11:55

read my first sentence

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White Stick follower

Feb 21, 2015 at 12:08

Yes I read your first sentence, but the Exit costs make it non viable, qv, With Profits Bonds, sold back in the early 2000's like mad as fantastic products, then a few years later the wheels came off,and no one wanted them. Lately I noticed, last week I think, an article possibly on CityWire recommending With Profits Bonds again. As before yes my wife has regular Income, but if one company can manage to maintain the value why not others. The worst one is out of the raft of Scottish stables and generally they all seem to have poor performance, apart from mine with Standard Life- not exciting but making gains.

So, as before, why are IFA's recommended especially for older folk who don't understand the markets? No doubt some are good, but this top firm wasn't. Indeed even the contracted 'annual Reviews' don't occur. After 3 years of seeking these and getting less & less responses- the last was a 'phone call from the IFA whilst he was driving his car, we gave up. The constant theme- These are long term investments they will come good in time and also there are annual & terminal bonuses, but the annual ones have fallen to in certain cases 0%. So yes my wife could get out and lose even more money.

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RippedOff

Feb 23, 2015 at 10:56

After much trying and sackings we engaged my last IFA who was quasi recommended by Which and had so many awards he couldn't display them all on his letterhead/footer. Yet he forgot we had a number funds including pensions. He had not caught up with anti gender legislation re annuities. He issued invoices for work which he had not done, held on to commission despite his website etc indicating he would not do this. I could go on. We sacked them on the basis of 'breach of contract'. They were the final straw and since then we have managed our own investments. If you can find a good IFA - and one must exist - then you are a better person than I am.

In 2000 the IFA should have declared in writing what commission(s) he would be receiving. You also seem to have good grounds for breach of contract. Speak to a solicitor (check your insurances you may have a free helpline). Start a formal complaint and eventually take it to the FSO. This will cost you nothing, except your valuable time.

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White Stick follower

Feb 23, 2015 at 11:56

I did complain on behalf of my wife, and got a ' Sorry' about the misunderstanding about the lack of reviews, but assuring me that the reviews are always done 'in house' and clients are only alerted when there are concerns. As for With Profits well the performance is in line with the industry in general and there is little that can be done, and of course 'Values can go Up or Down, but over the long term normally smooth out. 'MVA's are high at present' but as soon as things improve they'll let us know. Total silence since.Of course the firm's happy to arrange new investments. I have just re-read through the 27 page Financial Report & Recommendations, Each fund's Initial charge (less what we gain in discount by using this IFA), is listed plus the funds annual management commission, but not one word about what the IFA will earn. Report dated in late 2001.

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