ESMA said its study had been prompted by a growing number of investigations by national regulatory authorities, complaints from consumer organisations and media attention into so called “closet tracking”.
At the heart to this problem is an alleged practice in the European investment management industry whereby an asset manager claims to manage their funds in an active manner and charges fees accordingly, but in fact the funds stay very close to a benchmark.
ESMA’s study looked into equity funds domiciled in EU member states that were not categorised as index-tracking UCITS. They also had to have assets under management of more than €50m, have an inception date before 1 January 2005; and management fees of more than 0.65%.
It found more than 2,600 Ucits that met the criteria and was able to retrieve data for 1,251 Ucits sub-funds for the period 2012-2014.
"Fund managers must provide investors with information that is fair, clear and not misleading."
Esma said that of the funds where less than 60% of the holdings differed from the benchmark and where the overall fund had a tracking error of less than 4% to that benchmark, 15% could be classified as potentially being closet indexers.
Of funds with an active share of less than 50% and a tracking error of less than 3%, around 7% could be classified as potential closet trackers, ESMA said.
“Investor protection is core to our mission and the preliminary findings raise questions that merit closer analysis,” said ESMA chairman Steven Maijoor.
“Fund managers must provide investors with information that is fair, clear and not misleading. In partnership with national regulators we are taking a closer look into this issue,” he said.
More work needed
Maijoor said ESMA would continue to work with national regulators to determine what actions should be taken as the analysis to date only provided a first indication of whether particular funds are closet index trackers.
Future work will include an active role for ESMA in coordinating further analysis being carried out at the national level. However, it said investigations into particular funds remains under the remit of national authorities as part of their regular supervisory work.
“ESMA considers it important that fund managers take their commitments in disclosure documents seriously. Managers should expect supervisory consequences where evidence for incorrect disclosures is proven,” the supervisor said.